Monthly Market Insights: The $33.6 Trillion Problem

By Dr. Sylvia Kwan

October was supposed to be all about pumpkin spice and everything nice. Too bad Halloween came early this month, in the form of an unexpected rise in interest rates, spooking investors and triggering volatility across all stock indices. The S&P 500 ended the month down 2.2%, the NASDAQ down 2.8%, and the DJIA down 1.4%, marking October as the third consecutive month of market losses.

The Federal Reserve hasn’t raised rates since July; yet rates have climbed 1% since then, and the benchmark 10-year US Treasury Yield briefly hit 5% in October, a level not seen since 2007. There’s a laundry list of reasons why, from the widening federal budget deficit to strong and unexpected Q3 growth in gross domestic product (GDP). 

But it’s all relative, which is to say that it’s most useful to put things into context. 

Interest rates have risen from near 0% to 5.25% in less than 18 months. After decades of ultra-low rates, 5.25% feels awfully high. But zoom out further, and as the chart below implies, it’s still lower than the long-term average of 5.88%

In January, economists predicted a recession, expecting that increasing interest rates coupled with high inflation would tap the brakes on the economy and send it into negative growth territory. Those predictions turned out to be wrong. The economy grew at an annual growth rate of 4.9% in Q3, driven by low unemployment, slowing inflation, and a 37% increase in US household net worth — all fueling consumer spending. The resilience of the economy has surprised many — that’s the good news. The bad news for investors? It means the Fed isn’t likely to lower rates anytime soon. 

Adding to investor concerns is the 2023 fiscal year budget deficit of $2 trillion (excludes President Biden’s federal student debt cancellation plan which never took effect). This deficit is twice that of the year before, adding to an already heavy debt load of $33.6 trillion. With higher interest rates, the cost of financing all of that debt is, well, downright frightening. 

Let’s unpack what changed from fiscal year 2022 to 2023 and put that number into context.

Whichever way you cut it, $2 trillion is a big number, especially in isolation. It’s obvious to anyone who manages a budget that deficits grow when you receive less revenue and your spending rises. In fiscal year 2023, US tax revenues were down significantly from last year. 2022 was a year of stock and bond losses, which means lower capital gains and less tax revenue. Second, due to severe weather in California, the tax return filing deadline for those residents was extended to October 15, so many taxpayers (including yours truly) didn’t file their taxes until after September 30, the end of the US fiscal year. Economists have estimated the impact of California taxpayer revenue at about $100 billion. Those revenues will now be counted toward the 2024 fiscal year. On the expense side, inflation and cost of living adjustments led to higher Social Security payments (estimated to be $134 billion), Medicare costs (estimated at $92 billion), and higher interest on debt due to rising rates (estimated at $184 billion).

A growing deficit means the government will need to issue more and more debt to cover its expenses. And at today’s higher interest rates, that means more of the budget will go toward meeting interest payments. While the absolute amount of debt at $33.6 trillion is staggering, what’s more important is how it stands relative to US GDP. If an economy can grow at a high enough rate, it increases its capacity to take on more debt. A measure of the US’ ability to repay its debt is the US debt/GDP ratio, largely considered a barometer of financial health. This ratio passed 100% in 2013 and is projected to grow to 124% at the end of 2023 and 192% by the end of 2053, according to the US Congressional Budget Office. The chart below shows how this ratio has grown significantly over the last five decades.

There are two primary ways to reduce our nation’s debt load and narrow the federal deficit: increase tax revenues and cut spending (and/or a combination of the two). That’s really the crux of Congressional budget wrangling, with one side wanting to raise taxes and the other to decrease spending to achieve better fiscal health. 

But what if we could get a boost in economic productivity that increased GDP at a rate that could keep up with spending? 

That’s the potential promise of artificial intelligence (AI) and all its applications. A study from PWC forecasts that AI will boost the GDP of North America by 14.5% and that these productivity gains could materialize quickly (aka by 2030). Another study believes that the increase in US GDP due to the net impact of AI could be as high as 21%. So much is still uncertain, but the promise of AI and its potential impact on productivity and GDP — ‌not just in the US but globally — has significant implications on the trajectory of the US economy and its ability to manage an increasing debt burden. 

As year-end approaches, diversification is still your best defense against the unknown. And while we hope for a little less fright and more pumpkin spice, hope isn’t a strategy. What is: being prepared with a diversified portfolio, as we recommend here at Ellevest, to help withstand market ups and downs.

Learn more about working with our all-women team of Ellevest Private Wealth Management financial advisors and read more about how we’re here to support you with all aspects of your wealth. 


© 2023 Ellevest, Inc. All Rights Reserved.

All opinions and views expressed by Ellevest are current as of the date of this writing, are for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal, investment, or tax advice.

The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.

Investing entails risk, including the possible loss of principal, and past performance is not predictive of future results.

Ellevest, Inc. is a SEC registered investment adviser. Ellevest fees and additional information can be found at

Dr. Sylvia Kwan

Dr. Sylvia Kwan is the Chief Investment Officer of Ellevest.