Let’s talk about the elephant in the room.
How Countries Borrow Money
Any country in the world can borrow money, just as any private citizen or corporation can do. When countries borrow money, they issue bills (less than 1-year maturities), notes (2 to 10-year maturities), or bonds (10 to 30-year maturities), which are marketable securities for investors to buy. These countries are then lent this money, or not, based on the assessed likelihood (probability) that investors give of that country paying them back. The interest rates (called coupon rates) that are imposed by the market on those bonds move in inverse to the likelihood of the debt being paid back: i.e. high likelihood, low interest rates. Low likelihood, high rates. The process of issuing those bonds is a sophisticated process, but it’s not that complicated.
The U.S. National Debt
The United States of America is one of those countries. Its federal government can and does borrow money to finance its growth (think building interstates), protect its sovereignty (think paying soldiers), or care for its citizens (think Medicaid and nutrition programs at schools). To pay for these various costs, it levies fees and taxes (generally income taxes). If you have enough money coming in in any one year (the year-end for the federal government is September 30th each year), you run a surplus. If you spend more money than what comes in each year, you have a deficit. Just like an open line of credit, if you keep having deficits, you have an accumulation of debt. We call that accumulation the National Debt.
Do We Have Too Much National Debt?
Now, let’s introduce the elephant: Do we have too much National Debt?
Because they say a picture is worth a thousand words, please see the graph below:
The answer on the question of whether we have too much national debt is that I firmly do think so.
Comparative Measures
You can’t perfectly tell by just looking at the graph above, though that is scary enough. To accomplish this assessment objectively you need to know how much debt relative to what? Because the numbers are so big, they overwhelm people, let me attempt to answer that question with some helpful comparators:
- The most common way countries around the world measure debt would be as a ratio of its absolute size compared to the size of its productive capacity. The productive capacity of the United States is measured by its Gross National Product (GNP). We have just seen our accumulated debt held by the public ($24,580 Billion[i]) reach 95% of the annual GNP ($25,885 Billion[ii]) as of the end of September 2022. 100% is commonly considered the “tipping point.”
- Countries can rationally increase their outstanding debt by the rate that the country is growing and it’s considered a good investment. Over the last 100 years, our National Debt has grown from $400 Billion to $30,930 Billion[iii] (which includes “intergovernmental holdings” of roughly $7 Trillion), or an annual increase of 4.44%, a number which doesn’t sound all that bad given the average GNP growth of ~3% p.a. since 1947[iv]. However, the increase in this debt masks the dramatic increase over just the past 10 and 20 years, of 6.78% and 8.34% per annum, respectively[v], and that rate cannot be sustained.
- Finally, what do trend lines reveal? Where is the National Debt going? Surmising on that projection is the true test of fiscal prudence. The Congressional Budget Office budget analysis reflects debt held by the public will increase an astounding $22 Trillion ($22,000 Billion) in just 10 years! That’s a debt figure fundamentally doubling the current already elevated levels. In that case, the Debt-to-GDP ratio will increase by over 20% to 118%[vi].
Why Is the Growing National Debt a Problem?
Facing increasing National Debt at that rate is bad for various reasons, but the top two are that it threatens the country’s solvency and restricts choices for spending because interest rates gobble up available federal budget dollars. This mentioned trade-off on choices is further aggravated should interest rates increase on increasingly larger debt (it’s like having a floating rate mortgage on your house… not a good idea). Annual interest payments on the debt are expected to go up to $1.4 Trillion by 2033 from $475 Billion this year[vii]. Historically, looking for $5 Billion per year to fund some worthy program was a major request. If we don’t change our ways, that figure will be a rounding error on the interest payments. It is thus absolutely true that we are engaged in generational theft as your children and grandchildren will have to pay the tabs on the bill we are running up. That’s simply unfair.
Economic Trade-Offs
The solution is that hard choices have to be made, compromises must be made. The biggest problem we have as a country is just what my father would say if, as a young kid, I put too much food on my plate: “Your eyes are bigger than your belly.” Because we were pretty poor at home, I still remember that stinging look. By refusing to make tough and responsible trade-offs, Congress is inevitably driving up interest rates and income taxes, while simultaneously lowering the options of its citizens and economic viability of the country. Those results are not acting in your best interests. It’s time to get our home in order.
It remains my deep and distinct privilege to serve you.
Patrick Zumbusch
Founder and CEO
[i] “Fiscal Data” (Historical Debt Outstanding, Treasury.gov, February 27, 2023)
[ii] “Gross Domestic Product” (Federal Reserve Economic Data (FRED), Economic Research, St. Louis Federal Reserve)
[iii] “US National Debt Over The Last 100 Years” (chart (see attached), Treasury.gov)
[iv] Gross Domestic Product Growth Rate; 1947 – 2021 (Trading Economics.com, February 27, 2023)
[v] Fiscal Data” (Historical Debt Outstanding, Treasury.gov, February 27, 2023)
[vi] “How The U.S. Can Prevent A Debt Spiral” (William Galston, Wall Street Journal, February 21, 2023)
[vii] “CBO: $19 Trillion In New Debt Over The Next Decade, Mostly From Programs Nobody Will Cut” (Howard Gleckman, Forbes, February 16, 2023)
