The Ever-Rising U.S. Public Debt – Ten Questions and Answers

Our inaugural Must C report looks at the debt situation from historical, international, and macro perspectives, with our analysis organized around 10 key questions. We reach several conclusions, which we explore in more detail in the report:

• As debt levels rise, we have no way to predict danger thresholds or how much debt is “too much.” But we think it’s unwise for policymakers to experiment or test where these thresholds might be. In our view, the prudent path for fiscal policy is, at a minimum, to not push debt further upward from today’s elevated levels. But we admit that we have little hope of meaningful remedial action in the foreseeable future.

• We don’t see a full-blown adverse scenario as likely, but last year’s UK gilt crisis still stands as a cautionary tale. The hallmark of an adverse scenario would be a sharp, unexpected deterioration in market appetite for Treasuries, leading to sharply higher Treasury yields and rising risk premiums in credit and equity markets. Given the dollar’s status as a reserve currency, these stresses would be quickly transmitted to financial markets abroad.

• We think the most likely scenario is that markets’ discomfort about the U.S. debt trajectory will eventually fade, with the situation broadly reverting to the more relaxed pre-COVID configuration, and only modest premiums will be required to absorb the forthcoming issuance. If we’re right, the core strengths of the U.S. economy will give investors the confidence to purchase Treasuries, notwithstanding high debt levels and political noise. And at the end of the day, there are few alternatives to Treasuries.