The Debt Ceiling’s Double Talk

The $40 trillion national debt milestone has been met with a mix of alarm and complacency from economists, but one thing is certain: interest rates on that debt are rising at an alarming rate. For decades, some economists have warned about the dangers of high debt, while others have dismissed it as a manageable problem. But now, even those who once saw the debt as a minor concern are sounding the alarm.

Martha Gimbel, executive director of the Budget Lab at Yale, notes that part of the reason some economists are changing their tune is because they’re starting to realize that interest rates will likely remain high for an extended period. The average interest rate on U.S. debt has been rising steadily over the past few years and is now hovering around 3.4 percent, up from just 1.5 percent a year ago.

The rise in interest rates can be attributed to several factors. Some experts point to the Federal Reserve’s reaction to inflation as one reason, while others suggest that growing demand for credit from tech companies and their investments in artificial intelligence may also play a role. Additionally, there is concern about the deficit and the government’s ability to sustain it.

Investors are increasingly viewing long-term Treasurys as riskier than they once did, demanding more money in exchange for taking on America’s debt. The federal government has shown little appetite for reducing the debt through traditional means – cutting spending and raising taxes. Jared Bernstein, former head of Joe Biden’s Council of Economic Advisers, has “flipped from dove to hawk” on this issue, partly due to the government’s complacency.

The One Big Beautiful Bill Act will add an estimated $4.7 trillion to the deficit through 2035, while Donald Trump’s efforts to decrease immigration will add another half a trillion to that number over the same period. Despite recent attempts at short-term stabilization, the administration hasn’t done much to reassure creditors that everything is fine – and now they’re seeking greater yields as a result.

Rising interest rates are having a direct impact on everyday Americans. Mortgage rates and student loan rates are becoming more expensive, making it harder for people to afford their homes and education. As Ernie Tedeschi puts it, “This is a kitchen-table issue in the same way that inflation is.”

The Treasury Department’s recent announcement to double its longer-term-bond buybacks was an attempt to depress yields, but it only worked briefly. Yields climbed higher than before about 24 hours later. This has led some to question whether this is a distraction from the real problem – the government’s spending.

Stanley Druckenmiller, investor and deficit hawk, wrote in a scathing op-ed that the increased buybacks are just a Band-Aid solution. The problem lies in the fact that the two most important levers for reducing the debt – raising taxes and cutting spending – remain unpopular among lawmakers and voters alike.

Treasury Secretary Scott Bessent has suggested stimulating the economy to outpace interest rates, but without a concrete plan in place, this sounds like wishful thinking. Politicians are more concerned with avoiding tax increases than addressing the debt problem, which is driving up interest rates and making it harder for Americans to afford their homes and education.

As Tedeschi notes, “This is the era of ‘No tax on blank’ in our politics right now.” A change in mentality is needed if we want to stabilize our debt going forward. The days of low 3 percent mortgage rates are gone, and with affordability concerns playing a major role in the midterms, politicians aren’t exactly clamoring to raise taxes on their constituents.

But affordability is exactly what’s at stake if Washington doesn’t at least attempt to chip away at the debt problem. Without a shift in priorities, it’s likely that interest rates will continue to rise, making life even harder for everyday Americans.