MW Wolf at the door: Why Obama's former budget director is now sounding alarms about debt

By Barbara Kollmeyer

Peter Orszag has ideas on how to fix it, but says time is running out

The makings of a rally are ready to greet investors after the long holiday weekend, thanks to another tariff reversal from President Trump.

And bond yields continue to ease. That's a sore point for Deutsche Bank, where strategist Henry Allen points out the 10-year Treasury yield at around 4.5% is at a level seen before the global financial crisis "even though U.S. public debt is more than double what it was then."

On that note, our call of the day from Peter Orszag, President Barack Obama's former budget director, warned of "alarmingly elevated" U.S. fiscal risks, in an op-ed for The New York Times.

Now the chief executive and chairman of Lazard $(LAZ)$, Orszag admits he tuned out the worrywarts for years. "With very low interest rates, a lack of particularly attractive alternatives to serial Capitol Hill dramas over raising the debt limit, those who bemoaned the unsustainability of deficit spending and debt levels seemed to cry wolf - a lot," wrote Orszag.

"Two things have changed: First, the wolf is now lurking much closer to our door," he said, noting that annual federal budget deficits are running at 6% of gross domestic product or higher, versus "well under 3% a decade ago." Interest rates on 10-year Treasurys have more than doubled to around 4.5%, with the government set to pay more on interest-rate payments than "big essential budget items."

Second, publicly held federal debt excluding Federal Reserve holdings, as a share of GDP, is up by a third since 2015, and that is forecast to just keep climbing.

"All of this is occurring against a backdrop of an even more polarized political system, increased tension with foreign debtholders and less confidence in American security protections that promoted the dollar as the world's safe haven," said Orszag.

Some argue that no modern economy such as the U.S., with its freely floating exchange rate and debt denominated in its own currency, has ever defaulted on its debt. Weakening that is the fact America's fiscal position is completely unique.

With around a third of debt foreign owned - $9 trillion - the U.S. is heavily dependent on foreigners to keep its global reserve dollar status. If that wobbles, higher interest rates and stress on the fiscal position could result. Also, he said, Treasurys in the future could face competition from another country's more attractive debt.

Orszag offered solutions to the deficit problem, the first that the U.S. embraces its world-reserve currency status and that great privilege. The second is to eliminate the debt limit, which "only creates unnecessary distractions, and then lock in long-term rates by extending maturities on some Treasury debt.

"The basic idea is to borrow over 30-year periods or even longer, rather than borrowing over a short period and then having to refinance every few years," he said. The U.S. economy should also aim for higher growth, though it's tough to enact policy changes to help that, he said.

What else needs to be done, though probably won't, is "generate fiscal savings in our large entitlement programs and raise revenue." He suggested changes could be made to use AI in healthcare and doctor decision-making and an aggressive push to pay for quality over quantity.

While the current budget legislation moving through Congress will only make things worse, getting the budget deficit down, should be priority one, he said.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are up strongly on renewed trade deal hopes, while Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y pull back and gold (GC00) is sinking.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              5802.82    -2.61%  5.02%   -1.34%   9.39% 
   Nasdaq Composite                                                     18,737.21  -2.47%  7.79%   -2.97%   10.73% 
   10-year Treasury                                                     4.473      1.90    26.20   -10.30   0.30 
   Gold                                                                 3326.6     1.03%   -0.03%  26.04%   40.81% 
   Oil                                                                  61.18      -1.72%  1.73%   -14.87%  -23.79% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Trump has pushed back a 50% tariff threat on the European Union, made at the end of last week, to July 9.

Tesla's $(TSLA)$ chief executive Elon Musk says he'll go back to working 24/7 on the EV maker and his other businesses.

Trump Media & Technology $(DJT)$ reportedly plans to raise $3 billion to spend on crypto, and the stock is rallying.

Southwest Airlines $(LUV)$ will charge $35 for one checked bag starting Wednesday, and $45 for a second in some cases, The Wall Street Journal reports.

Durable-goods orders are due at 8:30 a.m., followed by the S&P CoreLogic Case-Shiller home price index at 9 a.m. and consumer confidence at 10 a.m.

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The chart

Ernie Tedeschi, director of economics at Yale's The Budget Lab, offers this chart of the effective U.S. tariff rate - at 6.5% for May, based on expectations for tariff revenue of about $22 billion for that month. "For comparison, fully phased-in tariff policy implies 18%. So tariffs still aren't fully biting & won't fully show up in the May economic data," said the former chief economist of the White House Council of Economic Advisers in an X post.

Top tickers

These were the most active tickers on MarketWatch as of 6 a.m.:

   GME   GameStop 
   NVDA  Nvidia 
   TSLA  Tesla 
   PLTR  Palantir Technologies 
   AAPL  Apple 
   MLGO  MicroAlgo 
   HOLO  MicroCloud Hologram 
   AMC   AMC Entertainment 
   AMZN  Amazon.com 
   QBTS  D-Wave Quantum 

Random reads

Risking life and limb for a chunk of cheese.

A Japanese comic predicting a summer earthquake is scaring away tourists.

Also in Japan: bears on the golf course.

-Barbara Kollmeyer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 27, 2025 06:48 ET (10:48 GMT)

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