Red JahnckeThe United States is hurtling toward a pair of potential financial crises in December: a possible debt ceiling standoff and a potential government shutdown. The continuing resolution allowing federal spending without a budget expires on December 11th. Then what?
Treasury debt is on track to hit the current $41.1 trillion debt ceiling in December, much sooner than even recent expectations. Treasury debt hit $40.0 trillion on August 18 and by month-end had reached $40.2 trillion. And it’s set to inevitably rise further in coming months.
President Trump is to host the heads of the G20 nations in Florida in December. That may be uncomfortable.
In past years, many have been either complacent or cynical, saying we can always agree on another continuing resolution (CR), the fiscal equivalent of kicking the can down road to avoid making hard decisions. They have called the debt ceiling a nuisance, with the ceiling always extended after some ritualistic song and dance.
Maybe not this year.
What is planned for the budget is unclear, but the Administration wants Congressional Republicans to pass an extension of the debt ceiling to 2029 as part of a pre-election budget reconciliation bill. Kicking the can down the road once again would be irresponsible.
Treasury yields are reflecting real concern. Last week government bond yields around the globe hit levels not seen in decades. As Treasury yields escalated gradually over the last couple of months, Treasury Secretary Bessent took defensive action. First, he engineered a highly unusual currency market transaction to prevent Japan, the largest foreign holder of Treasuries, from selling Treasuries for fear that the sales would depress prices and increase yields.
Then Bessent announced a program to double normal repurchases of outstanding Treasury long bonds. The program was self-evidently designed to keep a lid on long rates.
Ironically, Bessent’s moves were so unusual and so unexpected and signaled such obvious concern that they spooked the markets, resulting in the increased yields that he had hoped to prevent.
Yet, in a subsequent August interview on CNBC, Bessent evinced little concern, saying blithely “there’s nothing magic about the $40 trillion number, and we can grow our way out of that.” Then last week at the G20 Finance Ministers Summit in North Carolina, Bessent said the same about global debt, “The world is awash in debt…and the only way for us to get out of this is to grow our way out.”
In his August interview, Bessent placed seemingly unqualified faith in AI to spur U.S. growth, “…the returns on that, the companies, boy, are [going to] be so high, you know, they don’t really care what they’re paying (i.e. the interest rate on bonds companies are issuing to buy AI chips and to finance AI infrastructure).” He projected robust AI-driven productivity gains: “I don’t see why our productivity growth can’t be 2.5% or 3%” He said, “The CBO (Congressional Budget Office) projections, which are always wrong, are in the ones.”
While real U.S. GDP growth over the last 12 months has been only 2%, growth has picked up recently, with the Atlanta Federal Reserve Bank’s GDPNow projecting 4.8% real growth in the July-September quarter.
Over the next four months, the economy will have to grow really fast to outrun fast-growing U.S. debt. In September through December of last year, the debt increased by more than $800 billion. This fiscal year, we’ve accumulated debt at about a 40% higher rate than that. So, it sure looks like the debt will hit the statutory ceiling by Christmas.
Bessent could slow debt growth artificially by funding spending from Treasury’s enormous $1 trillion cash trove, the highest ever in the Treasury General Account.
In his August CNBC interview, Bessent hedged his bet on AI-driven growth by placing reliance on two other factors, tariffs and “fiscal consolidation,” by which Bessent means spending cuts. He said the deficit this year is bigger due to refunds of the IEEPA tariffs that the Supreme Court ruled illegal. He said revenue from the new Section-301 tariffs will do the opposite in 2027.
He said “we are going to be laser focused, the OMB director, myself, the president, on fiscal consolidation.” “Going to be” suggests “haven’t been.” He foresees “several hundred billion dollars” of savings.
What about the $67 billion to $95 billion supplemental spending bill, mostly to pay for the Iran war? What about the $450 billion that the Administration wants to add to the Pentagon budget, of which $350 billion is supposed to be part of the pending reconciliation bill? National security is critical, but good old-fashioned budget discipline would require that spending increases be offset by spending cuts or more revenue.
Bessent said he thinks we’ve seen peak deficits. Really? Once again taking the future view that indicts past inaction, he said “it’s gonna be a very exciting couple of weeks, a couple of months, as we put this together.”
Yes, it will be, with the practical deadline for the effort being December.
Red Jahncke is President of The Townsend Group, LLC, a public policy consulting firm in Connecticut and founder of The Red Line.com. He a nationally recognized columnist, who regularly writes about politics and policy. His columns appear in numerous national publications, including The Wall Street Journal, Real Clear Politics, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.
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