Does the United States have a Debt Problem?

Brennan McCarthy, CFP®

Since the pandemic is 2020, the Federal Debt has exploded relative to the country’s production. Fortunately for the U.S., the overall economy’s growth has also exploded coming out of the pandemic craze. Although there has been some pushback from the occasional politician, there isn’t much political will amongst them to find a way to balance the deficit by either cutting spending or raising taxes, both of those ideas are ones that generally result in failed re-election campaigns.

To make matters worse for the debt level, rising interest rates has sharply increased the borrowing costs for the US. 3 years ago, the Federal government could borrow for 0.01% (annualized rate) to issue a 3-month treasury bill, whereas today, it’s sitting at 5.35%. That increased interest rate puts substantially higher pressure on the amount they are borrowing and elevates the country’s interest expense.  

In some instances, the higher interest payments can lead to a “debt spiral,” where higher interest costs increase the government’s expenses, necessitating them to borrow more money just to service the debt. On a personal level, a debt spiral is like taking out a new credit card in order to pay off an existing credit card—it simply extends the timeline on an eventual rocky ending unless the spending habit is corrected.

On top of that, there’s a massive underlying risk that a recession could make the level of debt worse than it already is. If a recession causes companies to be less profitable and lay employees off (resulting in a higher unemployment rate and an overall reduction in Americans’ income), the government’s tax base decreases, and have even less revenue to offset the rising costs. In addition, recessions typically demand a further increase in spending from the government as a way to re-stimulate the economy. This would be a double-whammy against those debt levels.

On the flip side, the economy has been incredibly strong over the past decade. While the overall debt is at an all-time high, it can be easy to have “denominator blindness”—it’s important to compare what the country borrows over what the country produces to get an accurate depiction of how much of a problem the debt “crisis” is. The United States’ Debt-to-GDP has actually decreased since 2020 because the country’s overall production (GDP) has outperformed all expectations. The last time the US Debt-to-GDP was as high as it is today was the 1940’s during WWII. The problem fixed itself after the war by growing out of the debt (in other words, an economic boom made the debt levels much less of a concern).

In addition, the rising interest rates haven’t affected the overall interest payments as much as one might think, because the rate hikes have been so gradual and the Treasury was able to lock in long-term borrowing at rock-bottom interest rates over the past decade.

Ultimately, it’s impossible to know what level of debt would break the Federal Government.  We have records dating back to the Jeffersonian Republicans in the 1790’s opposing the federal debt levels even at that point. Up until today, those views have been proven wrong—we continue to operate the world’s most efficient economy even with $34 trillion in national debt. I agree with the premise that as long as the United States remains as the premier economy in the world, our debt can continue to increase without substantially negative consequences. But there will come a point where the debt level crushes our economy, and the government will be forced to raise taxes and mercilessly cut expenses-- hopefully by then, it's not too late.