Goldman sees US interest cost surge on rising yields, deficit

[TOKYO] A historic expansion in US borrowing during a period of economic growth, alongside rising bond yields, will cause a surge in the cost of servicing American debt, according to Goldman Sachs Group.

"Federal fiscal policy is entering uncharted territory," Goldman analysts including Alec Phillips in Washington wrote in a Feb 18 note to clients.

"In the past, as the economy strengthens and the debt burden increases, Congress has responded by raising taxes and cutting spending. This time around, the opposite has occurred."

Because the average maturity of US debt is almost six years, rising yields will take some time before they send the interest rate the Treasury pays to borrow above the growth rate of gross domestic product, Goldman estimates. When that does happen, it will send the ratio of debt to GDP (gross domestic product), which is already elevated, climbing further from about 77 per cent now.

If current fiscal policies are extended, the Goldman analysts predict that the US net interest expense relative to GDP will exceed the levels seen in the 1980s and early 1990s by 2027. And debt-to-GDP will probably be higher than 100 per cent, "putting the US in a worse fiscal position than the experience of the 1940s or 1990s," they wrote.

Looking for historical parallels among advanced economies, Goldman pointed out expansionary fiscal policies during economic growth periods in Belgium in the 1970s, Italy in the 1980s and Japan in the 1990s. In the cases of Belgium and Italy, debt ratios continued to deteriorate years later even after budgets were tightened, thanks to elevated interest costs, Goldman analysis showed.

BLOOMBERG