Chart of the Week

DIGESTING DEBT

Recent editions of Charts of the Month have been dominated by the US and specifically “Trumpmania,” but for good reason.

The Donald’s return as Commander-in-Chief will have a major bearing on the global economy and markets this year. Especially when it comes to fiscal policy.

For all the talk of budget cuts and a return to fiscal discipline, it’s important to highlight how government spending has been the main driver of GDP in recent years.

Take this away and the economy (and markets) would likely take a major hit, meaning tax cuts and large deficits should ultimately prevail.

However, that will heighten concerns surrounding the surging costs of servicing the sovereign debts.

The chart below shows the US net government interest payments as a percentage of GDP.
A combination of rising debt issuance and higher borrowing costs has seen this ratio almost double, to 4.5% of GDP, in just 3 years.

It reflects the fact the US Treasury now spends over U$1trn a year just on interest payments, which means the Trump administration has little margin for error when it comes to economic policy. At least as far as the bond market is concerned.