This week on Facing the Future, Moody’s Chief Economist Mark Zandi discussed the nation’s growing debt, the economy, and why policymakers should act to reduce budgetary pressures before financial markets force their hand.
Overall, Zandi said the economy is “okay.” He observed that there is growth, but “tenuous growth in the sense that it’s below the economy’s potential. And the job market, while it’s okay, is becoming a bit soft. You can see that in wage growth. The tenuous nature also is evident in the fact that the bulk of the growth is coming from really one part of the economy; that’s artificial intelligence that goes to capital investment, all the data center construction, and also the run-up in stock prices for AI companies that has generated a lot of wealth among the well-to-do.”
“The other aspect of the tenuous nature of the economy,” he continued, “is that the benefit really is accruing to the well-to-do; the folks in the top part of the income, wealth, and consumption distribution in the top 10%, 20%, maybe 25% of distribution. The rest of the American households are hanging in there by their fingertips. It just doesn’t feel all that great. That’s why you have polls and surveys suggesting that Americans are just unhappy about their financial situation because for the bulk of Americans, their financial situation is under a lot of pressure.”
Zandi described the federal budget’s structural deficits as “corrosive on the economy,” putting upward pressure on interest rates. “That means,” he explained, “housing becomes even more unaffordable because mortgage rates go higher. It means it’s more difficult to afford to buy a vehicle, making it more expensive for businesses to invest. And, of course, it’s a taxpayer burden because it adds to the nation’s interest expense, which is considerable.”
While Zandi said the nation is not in imminent danger of a fiscal crisis, he warned that, “There are a lot of different ways that higher interest rates weigh on the economy. Over time, that corrosive might undermine the foundations of everything and you actually get the floor falling out and you get interest rates spiking. Then it becomes a cliff event, not just a corrosive event. You get into a very dark place relatively quickly,” he said.
“You can’t put it into an explicit forecast,” Zandi noted, “but certainly it’s something to consider, and it’s certainly a growing threat, no doubt about it. There are dynamics in the bond market itself that make me more anxious that maybe that cliff event is closer than people think it is.”
One reason Zandi cited for this growing concern is his conclusion that the “plumbing” of the bond market has become more vulnerable. As federal borrowing has expanded dramatically, the structure of the market has changed. Traditional buyers such as primary dealers and foreign investors no longer play the dominant role they once did, while leveraged hedge funds have become increasingly important participants. That shift, Zandi warned, makes the market less resilient if investors suddenly begin demanding higher returns to finance America’s growing debt.
“The probability that the corrosion of the debt on interest rates turns into a cliff event is magnified, “ Zandi said “by the fact that the plumbing is just more leaky than it has been historically. There’s just these more fundamental problems in the market that are adding to the risk. And this is not just about governments issuing a lot of debt. Businesses are issuing a lot of debt. So when I say issuing a lot of debt, I mean a lot of debt. Bond issuance is extraordinary. There’s a lot of demand for that global capital”
The conversation also touched on the quality of the nation’s economic statistics. Zandi said he sees no evidence that official data are being manipulated for political purposes, but he expressed concern that staffing cuts and declining survey response rates are making federal economic data less reliable. That matters because policymakers at the Federal Reserve and elsewhere depend on accurate information when making decisions that affect inflation, employment, and economic growth.
Zandi emphasized that he “still believes in the resilience of the American political system and the American people, and that we’ll figure it out. Unfortunately, we’ll probably need a push to do it. I don’t think we’re going to get the kind of push that the Fed loses its ability to conduct policy. I don’t think that’ll be the case, but we’ll need something in that direction to kind of force us to generate the political will necessary to make the changes that we’re going to have to make.”
“Maybe we’ll see interest rates jump and that’s the catalyst for the political will,” Zandi said. “Or, another forcing mechanism could be Social Security and Medicare because those trust funds are coming due, and lawmakers need to pass another piece of legislation dealing with that in some way. Maybe that’s the forcing mechanism that brings everyone together and we make some hard decisions about what we’re going to do and how we’re going to do it, both on the tax side and on the spending side.”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
