U.S. finances in a dangerous cycle

The U.S. financial system has entered a perilous cycle, with national debt surpassing 40 trillion dollars, approximately 34.3 trillion euros, for the first time, according to data released by the Treasury Department midweek. The situation has escalated further as interest rates for 30-year U.S. government bonds have climbed to their highest level in nearly two decades. On Friday, these yields continued to rise, raising concerns among economists and policymakers. Despite efforts by Treasury Secretary Scott Bessent to stabilize the market, his interventions have had limited success. In an attempt to manage rising bond yields, Bessent announced plans to double the amount of long-term Treasury securities purchased from the market. Initially set at $2 billion per month, the program was expanded to $4 billion. This strategy aims to reduce supply, which typically drives up bond prices and lowers yields. However, the effect was short-lived. Immediately following the announcement, yields for 30-year Treasuries fell by around nine to ten basis points. By Thursday, the decline had reversed, with yields climbing back to 5.24 percent, nearing recent peaks. The core issue lies in the structure of Bessent’s plan. Known as the “Bessent Bid,” the initiative relies on short-term borrowing through Treasury bills, effectively shifting the composition of the debt rather than reducing overall obligations. As a result, the fundamental problem persists: higher interest payments increase deficits, which in turn lead to more borrowing. This creates a self-reinforcing cycle that threatens long-term fiscal stability. Bessent remained optimistic during a CNBC interview on Thursday, stating that the Treasury could potentially purchase more than $4 billion worth of bonds per transaction. He emphasized that the administration possesses a wide range of tools and argued that current yield levels do not reflect underlying economic fundamentals. Additionally, he hinted at future measures aimed at budget consolidation, though specifics remain unclear. Over the past three months alone, U.S. debt has increased by one trillion dollars, according to reports from the Frankfurter Allgemeine Zeitung. Contributing factors include the ongoing conflict with Iran, tax cuts implemented by the Supreme Court-ordered refund policies, and the cost of financing itself. Against this backdrop, Bessent’s actions appear less as a solution and more as a temporary measure to buy time. Structurally, the U.S. government has consistently run large deficits, regardless of whether it is controlled by Republicans or Democrats. Deficits exceeding six percent of gross domestic product have become routine. The Congressional Budget Office predicts a deficit of $2.1 trillion for the current year, far above Bessent’s initial target of keeping deficits below three percent of GDP. For sustainable resolution, either the U.S. economy must grow faster than its debt, allowing debt-to-GDP ratios to decline, or the government must cut spending and/or raise revenues. Alternatively, both approaches would need to be pursued. Politically, however, such reforms are far more challenging than simply purchasing billions in Treasury securities. Any serious fiscal consolidation would require difficult decisions in areas that are inherently sensitive for any administration. At the same time, austerity measures could slow economic growth, which is precisely what Washington seeks to stimulate. The critical question remains unresolved: will Bessent’s efforts to temporarily lower yields prove sufficient, or will they merely delay the inevitable? The answer will depend on broader economic conditions, political will, and the ability to implement lasting structural changes. For now, the U.S. financial system continues to operate within a precarious loop, with no clear exit strategy in sight.