A group of economic authorities said that the long-term risk brought by the continuously rising federal debt is the top issue facing the US economy.
These risks include a situation where the scale of debt prompts central banks to keep interest rates low to minimize debt servicing costs rather than to curb inflation – a concept known as fiscal dominance.
“The preconditions for fiscal dominance are clearly strengthening,” former Treasury Secretary and Federal Reserve Chair Janet Yellen said during a panel discussion at the American Economic Association’s annual meeting in Philadelphia on Sunday.
The Congressional Budget Office of the United States predicts that the federal deficit this year will reach 1.9 trillion US dollars, raising the total debt-to-GDP ratio to approximately 100%. It is projected that this ratio will rise to about 118% of GDP over the next decade.
Yellen also pointed out that President Donald Trump had “publicly demanded” that the Federal Reserve lower interest rates, with the clear aim of reducing the government’s debt servicing costs.
Yellen had previously stated that if Trump were to successfully pressure the Federal Reserve to maintain low interest rates to alleviate the government’s debt burden, the United States would be at risk of becoming a “banana republic”.
In the same group discussion, Loretta Mester, the former president of the Federal Reserve Bank of Cleveland, added that the most terrifying aspect of the current debt problem is that officials in the Trump administration seem not to understand the threats involved.
She said, “Previous governments knew they were on the edge of a cliff,” even if they ultimately failed to take responsible measures to control the deficit. “I think this government may not be aware of the consequences.”
Despite this, Yellen said she hopes a crisis – perhaps the impending bankruptcy of Social Security and Medicare – will prompt Congress to reach a bipartisan agreement on budget reform.
“I suspect that Americans will eventually take the path of fiscal dominance, but I definitely think this danger is real and should be paid attention to,” she said.
David Romer, an economist at the University of California, Berkeley, said he was “not very optimistic” about the two parties reaching an agreement to avoid a “fiscal disaster”.
Romer said, “We are facing a fiscal problem. If we don’t solve this problem, it will cause trouble for everyone, including the Federal Reserve.”
