Growing interest in U.S. debt

From: POLITICO's Morning Money - Tuesday Oct 03,2023 12:02 pm
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By Victoria Guida and Jasper Goodman

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QUICK FIX

Federal Reserve officials expect to keep interest rates high for years, and it’s not just credit card holders and homebuyers who will feel the pinch. The U.S. government will too, to the tune of trillions with a T.

It hasn’t been difficult for the federal budget to balloon well beyond revenue. That’s not just because it’s easy to finance, with U.S. sovereign debt an attractive asset sought the world over, but also because rates had been so low for a decade and a half.

No longer. Now the Fed expects to keep its main policy rate above 5 percent through the end of next year. By the end of 2026, it could still be at roughly 3 percent. If that bears out, that’s a brave new world.

The piece of the budget eaten up by interest payments is already projected to be about 10 percent, or $663 billion, for fiscal 2023, according to the Center on Budget and Policy Priorities. And the Congressional Budget Office expects those costs to grow. That’s compared to an estimated $806 billion for national defense.

“If you look at the CBO outlook, we’re going to spend about $80 trillion over the next 10 years, and about $10 trillion of that is interest,” Douglas Holtz-Eakin, who headed the office under George W. Bush, told MM. That’s based on the 10-year Treasury note settling at 3.8 percent, compared to about 4.6 percent right now, leaving open the possibility that those costs could grow by, say, another trillion or so.

How much should we care? That’s tough to answer. There are, of course, modern monetary theorists who believe that government spending is too high only when it causes excessive inflation, and otherwise isn’t a problem.

But mainstream economists generally argue that there are costs to allowing government debt, and interest on it, to become too large in proportion to GDP, with implications for productivity and growth.

What’s less clear is whether voters care. Sure, they tend to say they do. But debt is an abstract idea that doesn’t seem to drive votes. Sarah Binder, a political science professor at George Washington University, said when it comes to principles, people tend to be conservative, criticizing the notion of “out-of-control spending.”

“But operationally people are kind of liberal,” balking at cuts to popular programs, she added. And they don’t want to pay more in taxes either.

One irony is that some American households are also benefiting from higher interest costs.

Apollo Global Management’s Torsten Slok, who has a chart for every occasion, recently pointed out that U.S. households have bought about $1.5 trillion in Treasury securities since the Fed started raising rates (this category includes domestic hedge funds, so take that into account, but it’s still a big jump). “Real money” investors like pension funds and insurance companies have also jumped into the fray over the past six months.

Another irony: discretionary spending — the part that continually leads to threats of a shutdown or debt ceiling breach — is only a quarter of the budget. The lion’s share of federal dollars go to entitlement programs. Social Security, Medicare and Medicaid alone are about 40 percent of the budget.

President Joe Biden’s administration has pushed for more revenue, such as through higher taxes on wealthier Americans and businesses and fewer loopholes. But with Trump-era tax cuts expiring in 2025, the next president will have to negotiate what to extend, potentially adding significantly to annual deficits.

Higher interest costs are getting attention in Washington, “but it’s not producing anything like a coherent strategy to deal with the budget outlook,” said Holtz-Eakin, now head of the right-leaning American Action Forum.

Still, and here’s the rub: we’re not close to a crisis, he said: “Our problem is not going to be something that looks like Greece or Portugal; we’re a mess but so is the rest of the world. We’re still a relatively attractive place to put your money.”

HAPPY OCT. 3 — Also known as Mean Girls Day. Send tips and spooky movie ideas to your regular MM hosts, Zach Warmbrodt and Sam Sutton, as well as your trusty stand-ins, Victoria Guida and Jasper Goodman.

 

A NEW POLITICO PODCAST: POLITICO Tech is an authoritative insider briefing on the politics and policy of technology. From crypto and the metaverse to cybersecurity and AI, we explore the who, what and how of policy shaping future industries. We’re kicking off with a series exploring darknet marketplaces, the virtual platforms that enable actors from all corners of the online world to traffic illicit goods. As malware and cybercrime attacks become increasingly frequent, regulators and law enforcement agencies work different angles to shut these platforms down, but new, often more unassailable marketplaces pop up. SUBSCRIBE AND START LISTENING TODAY.

 
 
Driving the Day

The Supreme Court hears arguments in the CFPB funding case … Jury selection begins in SBF’s fraud trial in New York … August job openings data is out at 10 a.m.

Fast-moving fall — CFTC Chair Rostin Behnam is preparing for a flurry of rulemaking this fall, our Declan Harty reports from Chicago. He plans to bring around a dozen proposals, final rules and other matters before the end of the year.

“We still have a few months left of 2023, and I intend to make the most of them,” Behnam said at a derivatives industry conference Monday.

Barr’s view — The Fed’s top bank cop, Michael Barr, said in a New York speech Monday that interest rates play an important role in the stability of the financial system but argued that monetary policy shouldn’t be the primary tool for keeping markets safe, Victoria reports.

First in MM — The American Fintech Council, a lobbying group representing fintech companies, is adding a dozen new members. The group, formed in 2021, will now include a range of new banking-as-a-service banks, which partner with fintechs that provide financial services.

“Innovative BaaS banks are facing a crisis of a significant mismatch between the innovation driving consumer access to financial services and the regulatory mechanisms designed to ensure a fair and transparent banking system for all,” AFC CEO Phil Goldfeder said in a statement.

In honor of today’s oral arguments — Eighty-two percent of voters said they support the mission of the CFPB in an online survey conducted last month by a bipartisan polling team, Lake Research Partners and Chesapeake Beach Consulting. The poll — which was commissioned by the consumer groups Center for Responsible Lending and Americans for Financial Reform — found 88 percent of Democratic voters and 77 percent of GOP voters favored the consumer bureau after hearing about its purpose. — Katy O’Donnell

In attendance at oral arguments will be House Financial Services ranking member Maxine Waters (D-Calif.) and Rep. Andy Barr (R-Ky.), among others. Barr chairs the House Financial Services subcommittee with jurisdiction over the agency — and led congressional Republicans in filing an amicus curiae brief in July. He also has a bill that would give Congress say in the agency’s funding. — Eleanor Mueller

Crypto ETFs, ETH futures version — In the latest landmark moment for cryptocurrency ETF believers, a pack of funds tied to futures on ether, the second largest digital asset, debuted Monday. The first day of trading, however, was less than stellar with muted volumes and all but one ETF rising during market hours. — Declan Harty

CLIMATE BATTLES

Wanted: private climate cash — The IMF said Monday that developing economies will need a big influx of private investment to achieve net-zero emissions, Reuters reports. The IMF projects that growth in public investments will be “limited” and most of the $2 trillion in annual climate cash required by 2030 to achieve net-zero will need to come from the private sector.

Artificial Intelligence

All in on AI — JPMorgan Chase CEO Jamie Dimon said Monday that artificial intelligence will improve quality of life for workers, even if it replaces some jobs, Bloomberg reports.

“Your children are going to live to 100 and not have cancer because of technology,” Dimon told Bloomberg TV. “And literally they’ll probably be working three-and-a-half days a week.”

Search wars — Microsoft CEO Satya Nadella testified Monday that AI may not be able to interrupt Google’s stranglehold on the search engine market, the WSJ reports. Nadella, who said Google has used unfair tactics to set back competitors, is a key government witness in the Justice Department’s landmark antitrust case against Google.

 

Enter the “room where it happens”, where global power players shape policy and politics, with Power Play. POLITICO’s brand-new podcast will host conversations with the leaders and power players shaping the biggest ideas and driving the global conversations, moderated by award-winning journalist Anne McElvoy. Sign up today to be notified of new episodes – click here.

 
 
Congress

Unintended Consequences — Our Caitlin Oprysko reports that the federal corruption charges against Sen. Bob Menendez (D-N.J.) may create an unexpected opening for one industry: precious metals. Investigators found gold bars — and hundreds of thousands of dollars in cash — at the home of Menendez, a senior member of the Senate Banking Committee, who is accused of accepting bribes in exchange for information and official acts.

Fly Around

People moves — The Treasury Department has a raft of new political appointees: Adam Wang-Levine is now deputy assistant secretary for climate, environment and infrastructure. He is an alum of the National Economic Council and National Security Council. Subhan Cheema is now senior adviser for public affairs. He most recently was comms director for the Office of Science and Technology Policy at the White House. Adam Shaw is now special adviser for IRA implementation. He most recently was deputy director of the Global Economic Governance Commission at the London School of Economics. Allen Li is now special assistant in the office of the executive secretary. He most recently was an analyst at DOD and is a recent graduate of Auburn University. … Kyle Simpson is the Institute of International Bankers’ new Director of Government Affairs. He’s an alum of the House Financial Services and Senate Banking committees.

How do you do, fellow kids? — The Fed, which has been on social media sites like Facebook and Twitter (ahem, X) for a while now, is expanding its social media reach to include Instagram and Threads. So #FF @federalreserveboard if that’s your thing.

 

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