- The government's soaring debt balance poses problems for the US economy.
- Those include higher inflation, greater market volatility, and a lower quality of life for Americans.
- Slowing the pace of borrowing is critical for the future, economists told Business Insider.
The US is sitting on the biggest pile of public debt in its history, and economists are getting nervous about it.
The federal debt balance hit $34 trillion this year, with the government on pace to rack up another $1 trillion in debt every 100 days, per an estimate from Bank of America.
Why is that so worrying?
The mountain of debt is a breeding ground for economic problems, including higher inflation, lower quality of life, and — in the worst-case scenario — a destabilization of the wider financial system, according to Les Rubin, a markets veteran who has called the US debt situation one of the "greatest Ponzi schemes" in the world.
It's critical for the US to sell its debt to investors, which range from institutions, individuals, and other countries. But higher debt levels cast doubt on whether the US will be able to make good on its promises to keep paying it back, and the more people hesitate to buy the US debt securities, the more the economy is hurt, Rubin says.
The US Treasury sold $22 trillion in government bonds last year, but Treasury auctions recently have seen weak demand, suggesting that investors could soon have difficulty absorbing the huge rush of new bond issuance.
The most recent auctions of 10 and 30-year bonds were met with low enthusiasm as investors see higher for longer interest rates and stick inflation. The US will hit the market again in May with a $385 billion sale of new bonds.
"What would happen if we can't sell the debt is that we end up with an inability to function as an economy. The government survives on debt. If we literally could not sell our debt, we could not pay our bills," Rubin told Business Insider in an interview.
Debt itself is inherently inflationary, meaning consumers can expect higher prices if the government doesn't slow its borrowing.
That's because debt provides a measure of stimulus to the economy, which speeds up hiring and wage growth. If the economy is already at full employment, that means higher inflation as well, according to Jay Zagorsky, an economist at Boston University.
Inflation has been at least a full percentage point above the Fed's 2% target for nearly the last two years. Prices accelerated 3.5% year-per-year in March, the third-straight month inflation came in hotter-than-expected.
A smaller budget
Higher debt could also lead to a poorer quality of life for Americans, Zagorsky added. That's because the more the debt grows, the more the government has to shell out in interest to service that debt — and the less money the US has to spend on other priorities like Social Security and other crucial parts of the social safety net.
The US spent $429 billion last year on interest payments alone, according to Treasury data. That's 240% of what the government spent on transportation, commerce, and housing combined.
"Pretty soon one of the most important things the federal government's going to be spending money on is not defense, not on education. It won't be on housing, it'll be on interest," Zagorsky said.
Economic fallout
For investors to widely lose faith in US government debt as a safe haven would spark turmoil in financial markets, Rubin warned, thanks to the sheer amount of US debt held by institutions worldwide.
In the worst-case scenario, he sees markets melting down if debt levels get too high and people believe the US might not pay it back.
"Trillions of dollars that are on the balance sheets around the world will become substantially reduced in value or worthless. Interest payments could be curtailed. It would be a devastating blow to the world economy that would lead to eventually, chaos. We can't let it get there," he said.
There's little the government can do to stop those problems from brewing, other than to stop taking on so much new debt, Zagorsky and Rubin say. Technically, the government could print money to pay off its dues, but that would result in hyperinflation as the money supply skyrockets.
Robust economic growth can make debt more sustainable, but the debt is growing way faster than the economy — the national debt balance rose 86% over the last decade, while GDP grew by 63%, according to Fed data.
Economists are uncertain of when exactly the national debt will become a true problem for the US. If the pace of borrowing doesn't slow, Rubin anticipates a crisis of some sort materializing within the next decade.
"It starts slowly and then it accelerates rapidly. Right now I don't think anything is imminent. I would say we have 10 years or less to fix this problem. I think that may be the optimistic scenario," Rubin said.