Impact: Debts And Deficits

As Washington continues its spending spree, debts and deficits are becoming a crucial concern for economic growth. A decline in economic growth can be seen since the 1990s, and this might be attributed to the surge in debt. Keynesian theory advocated deficit spending during recessions, but policymakers embraced it even during expansions. Unfortunately, much of the spending shifted to non-productive areas like social welfare, which has a negative rate of return.
With a large portion of spending going towards debt service and social welfare, the economy faces challenges. This rising debt trend, coupled with household debt, is impeding real economic growth. A reversion to manageable debt levels would require significant reductions and might lead to a “great reset,” impacting economic growth severely.
The impact of rising debts and deficits on debt yields can be significant. As the U.S. government continues its spending spree, the increased borrowing to fund these expenses puts upward pressure on debt yields. When there is a surge in debt issuance, investors demand higher yields to compensate for the added risk associated with holding more debt.
The rise in debt levels and the potential risk it poses to the economy can lead to concerns among investors about the sustainability of government finances. In response, they may demand higher yields on government bonds to protect against the possibility of default or inflation eroding the value of their investments.
Higher debt yields have broader implications for the economy. As government borrowing costs increase, it becomes more expensive for the government to service its debt, diverting more tax dollars away from productive investments. This can lead to reduced funding for essential programs and services, hindering economic growth in the long run.
Moreover, rising debt yields can have a ripple effect on other interest rates in the economy. As government bond yields rise, it puts pressure on other interest rates, including mortgage rates and corporate borrowing costs. Higher interest rates can dampen consumer spending and business investment, further restraining economic growth.
Overall, the surge in debts and deficits can lead to higher debt yields, which may strain government finances, impact borrowing costs throughout the economy, and hinder economic growth prospects. As such, it is crucial for policymakers to address the root causes of rising debts and deficits to mitigate their adverse effects on debt yields and the broader economy.

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