Nobel Prize-winning economist Paul Krugman has urged policymakers and investors not to panic over the recent sell-off in government bonds and growing concerns about the United States’ rising national debt.
Treasury bonds came under renewed pressure earlier this week, pushing the yield on 30-year US Treasury bonds to about 5.3 percent on Tuesday, its highest level since 2007.
Borrowing costs also climbed in Europe, with German and French yields reaching their highest levels since 2011 and 2008 respectively, as investors assessed the economic impact of the ongoing Iran war and the inflationary pressures it has generated.
In the United States, concerns over higher interest rates have been compounded by the rapid growth in government spending and the country’s expanding debt burden, which is projected to reach $40 trillion.
Krugman, however, said the developments should not trigger widespread fears of a debt crisis. In a Substack post published Wednesday, he urged future policymakers to remain calm and resist what he described as attempts to create unnecessary alarm over interest rates and government borrowing.
According to Krugman, the latest rise in bond yields is being driven partly by increased demand for credit from the US government, which needs to finance its large budget deficit and debt obligations.
He also pointed to major technology companies involved in the artificial intelligence boom, including Meta and Google, which have increasingly turned to corporate bond markets to finance their growing investments.
Krugman said the technology companies are competing with the government and other borrowers for available credit, putting additional pressure on borrowing costs.
He attributed much of the expansion in the US deficit to tax cuts and higher government spending. The country’s debt has also accumulated through decades of spending on wars, economic crises and pandemic relief programmes under successive Republican and Democratic administrations.
Former President Donald Trump’s tax-cut legislation, signed into law last year, is expected to add about $3.4 trillion to the national debt through 2034, according to projections by the Congressional Budget Office.
Despite the mounting debt, Krugman rejected comparisons between the United States and Greece, which suffered a severe sovereign debt crisis in the early 2010s and was effectively shut out of international borrowing markets.
He argued that the United States has a major advantage because it issues debt in its own currency, reducing the risk of the kind of crisis experienced by Greece.
“There is very little evidence that fears of a Greek-style crisis are driving interest rates now,” Krugman said, arguing that current market pressures should not be interpreted as evidence of an imminent US debt collapse.
Meanwhile, the US Treasury Department announced plans to increase its purchases of outstanding Treasury securities in an effort to support the bond market and ease some of the pressure on longer-term yields.
The Treasury’s buyback programme, scheduled to run from September 9 to November 4, will allow up to $4 billion in purchases during each weekly operation, double the current $2 billion ceiling.
The programme will focus on longer-dated Treasury securities, beginning with bonds maturing in 10 years or more. However, economists have warned that the intervention may provide only limited reassurance to investors.
Mohamed El-Erian, an economist and professor at the University of Pennsylvania’s Wharton School, said the move could help reduce longer-term yields in the short term and lower borrowing costs for mortgages and other loans, but warned that it could also create unintended consequences.
