US cannot simply 'grow' its way out of fiscal difficulties

The US national debt has passed $40 trillion and the annual deficit is projected to exceed $2 trillion. US Treasury Secretary Scott Bessent argues that the US can "grow its way out" of the problem if it achieves annual growth of 3 percent, while insisting that the country has a spending rather than a revenue problem. But faster growth cannot substitute for fiscal discipline when the government continues to borrow on such a scale. Debt has been expanding much faster than economic output, creating a problem that is arithmetic before it is financial.

The Treasury is buying long-term bonds while issuing new debt, hoping to influence yields and market liquidity. But this changes the structure of the US' liabilities; it does not reduce them. The awkwardness was evident when the Treasury announced the buyback on the same day it issued $39 billion of new 10-year securities. The 10-year yield rose to 4.84 percent — its highest since 2023 — even after the Treasury announced a buyback of up to $6 billion of long-term debt.

When investors start demanding higher returns to hold US government debt, the consequences travel through mortgages, corporate borrowing, exchange rates and sovereign financing around the world. The growing willingness of different economies to reduce their exposure to US Treasuries is therefore a warning that confidence in the US fiscal model cannot be taken for granted.

Nor can the US administration reasonably blame the predicament on the Joe Biden administration. The US debt problem is structural, but its current acceleration has a distinct policy imprint of the incumbent administration. It has combined tax cuts with continued spending, pursued tariffs as a source of government revenue and embraced a broad fiscal expansion. Tax cuts without corresponding spending reductions widen deficits. Tariffs are an uncertain source of revenue and can raise prices and production costs. Meanwhile, rigid spending obligations remain difficult to restrain. The result is a policy mix that adds fuel to a fire the administration claims it is trying to extinguish.

Washington has treated tariffs as though foreign exporters will ultimately finance the US' fiscal needs. But weaponized tariffs are not free money. They distort trade, raise costs and can provoke retaliation. Worse, the administration has built part of its fiscal arithmetic around tariff revenues that face legal challenges. The Supreme Court's rejection of the president's broad tariff authority has already forced the government to find the money to refund about $100 billion in payments. A policy designed to reduce the deficit has thus created another fiscal headache.

Meanwhile, the AI financing bubble actively competes with Treasuries for limited market liquidity.

The US administration has also explored ways of persuading other economies to continue absorbing US debt, while hoping that a rapidly expanding stablecoin industry will create additional demand for short-term Treasuries. Such plans rearrange the furniture. They do not repair the house. If major foreign holders conclude that the US increasingly expects them to shoulder the consequences of Washington's fiscal choices, the logical response is greater diversification away from Treasuries.

This is where the US' debt problem becomes the world's. Higher Treasury yields therefore reprice assets everywhere, raise financing costs and can pull capital away from emerging markets. The International Monetary Fund has warned that fragility in the Treasury market could amplify cross-market contagion. A loss of confidence in US debt would not stay in the US.

The US administration responds to higher yields with bond purchases, to deficits with tariffs, and to concerns about foreign demand with pressure on allies and new sources of Treasury buyers. Each measure addresses a symptom while leaving the underlying fiscal imbalance intact.

Bessent's speech at the Republicans' midterm convention in Dallas on Wednesday — where he blamed the Biden administration for bringing the country "to the brink of ruin" — illustrates the political obstacle. If markets suspect that defending the incumbent administration has become more important than resolving the problem that is actually of its own making, the administration's credibility becomes harder to preserve.

The US does not need another "clever" way to shuffle its debt. It needs to stop adding to the pile faster than the economy can support it. That means confronting deficits, entitlement spending and the fiscal cost of tax cuts. But none of this is going to be easy. It will only add to the financial strain on US households, who are already fed up with inflation. This dilemma leaves Bessent with very little breathing room.

And getting the US administration to acknowledge that the policies now being used to manage the debt problem are themselves part of the problem may prove harder than selling another trillion dollars of Treasuries.