U.S. government debt is not a ticking time bomb

But a bit of austerity is probably inevitable.

Some folks asked me to write a post about whether the U.S. debt is a ticking time bomb. They were alarmed by this viral video of retired hedge fund manager Stanley Druckenmiller declaring that U.S. debt service costs are about to eat the rest of the budget:

Stephen Geiger @Stephen_Geiger

MUST WATCH: Incase you don’t realize how bad our debt/bubble situation is… listen now. Druckenmiller playing no games today

Now, Druckenmiller is not a perennial prophet of doom and gloom, nor is he a perma-hawk who always warns that deficits and/or inflation are about to destroy the economy. He correctly warned of inflation as early as September 2020, but he does not appear to be one of the people who (wrongly) warned that quantitative easing would cause inflation back in the early 2010s. A lot of finance-industry macro guys will tell the crowd what they want to hear, but Druckenmiller seems like a straight shooter.

What’s more, some of his concerns are clearly appropriate. Higher interest rates will raise the amount of money that the U.S. government has to spend on debt service, and that will crowd out other types of government spending. And in the long run, we will probably have to either make cuts to entitlement benefits or find significant new sources of cost reduction, which can be a politically tricky thing to do.

Personally, though, I think things aren’t nearly as bad as Druckenmiller thinks. U.S. interest costs won’t rise catastrophically in the short term, and there’s not really a reason to expect interest rates to stay high for decades. Furthermore, inflation will itself erode some of the national debt, reducing long-term interest costs relative to GDP.

It does seem clear, though, that increased interest costs — and the Fed’s unwillingness to finance higher government borrowing — will force a bit of austerity in the years to come.

Interest costs are going up, but it’s not that bad yet