Washington is producing intense drama these days. Tempers are flaring and name-calling is unprecedented. Meanwhile, one area of potential agreement is flying almost under the radar: the skyrocketing deficit. The federal deficit is closing in on $1 trillion in 2019 and could surpass it in 2020. The total -federal debt level, adding together all past deficits, will reach 100% of the gross domestic product in a few years, well above the 60% that many economists consider to be manageable. These projections assume good economic growth; in a recession, the deficit balloons even further.
For now, the good news is that the housing market recovery will help the economy grow in 2020 as increased homebuilding is addressing the housing shortage. But deficits, in the long run, are a threat: Interest payments alone could surpass defense spending within a decade. And mortgage rates could spike out of control.
If younger people ask their parents or grandparents about the interest rate on their first mortgage, they’ll be shocked to learn they were as high as 18%. How’s that possible? They seem like the rates charged by gangsters in back alleys?
When the government borrows, someone has to lend. U.S. Treasury bond buyers, in effect, become lenders. Buyers may be citizens, financial institutions, or foreign governments. With deficits expanding, the need for bond buyers will grow. If there -aren’t enough buyers, the government will need to offer higher interest rates, which will increase all borrowing rates. If the Federal Reserve gets involved, buying T-bonds with newly printed money, inflation could ignite.
The budget deficit is something like climate change. Today appears to be about the same as yesterday. But if it’s not addressed, something bad will likely happen at an unknown, future date. When mortgage rates rise to unacceptable levels, will the American dream of homeownership be lost?