👻 The $35 trillion fright

BOO! Happy Monday.

Three days until Halloween. Consider this your last chance to order a cheapo skeleton onesie from Amazon.

Today, a five-minute read on one of the biggest economic issues scaring America these days. No, it’s not inflation (although I covered that here).

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Halloween is in a few days, so I thought I’d write about the scariest topic imaginable.

The national debt (dun dun DUN).

$35 trillion dollars of pure terror, and one of the hottest-button issues for Americans today.

In a May 2024 Pew survey, 53% of respondents identified the deficit as one of the top problems facing the U.S. – ranking just between drug addiction and illegal immigration.

If you look for wisdom on how scary the national debt actually is, you’ll get a wide range of answers. Some experts, like Paul Tudor Jones, think the U.S. is on the edge of going broke (and thus, you need to buy gold, Bitcoin and cans of baked beans). Others brush it off, saying that everything is fine because the U.S. prints its own money.

I get asked a lot if I’m worried about the national debt, and my answer is always the same: yes and no.
One, because I’m an analyst, so I naturally see the complicated angles in everything.

Two, because the U.S. isn’t your broke, deadbeat cousin.

Everyone has that jobless family member who’s maxed out their credit cards on bar tabs and bad college football bets, begging you to let them stay on your couch “just for a day or two” (read: a month or two).

You’re either laughing or twitching from bad memories after reading that. I’m doing both.

Yet, for some reason, every conversation about the national debt morphs into a government version of a freeloader on the verge of bankruptcy.

When it comes to talking about debt in any capacity, you need to start with this assumption: debt is a tool, not a crutch.

Sure, we hear all the time about people using debt to live beyond their means. And in that way, debt can be one hell of a crutch.

But debt can be used strategically as well – as an option for financing when you don’t want to lose cash, an alternative to selling investments when their growth prospects look better than rates, an opportunity to start a business or buy a house.

It’s productivity versus waste. Leverage, not debt.

In that light, the U.S. government has $35 trillion in leverage. We’ve borrowed money because we can, not because we need to.

Last year, the federal government brought in $4.4 trillion in receipts – income, social insurance and excise taxes. The capacity to pay off the federal debt is there through more budgeting and higher taxes. People also forget that the U.S. does print its own currency, and the dollar is used in nearly 90% of all foreign exchange transactions. Your broke cousin could never.

America is not going bankrupt, and the government doesn’t necessarily need to pay off its debt  either. In fact, there’s an argument for the U.S. to stay in debt over time. Unlike your cousin’s credit card debt, the national debt plays an important – and productive – role in our economy. 

This is when I should explain how the U.S. racked up all this debt: Treasuries (and other government-issued debt). The federal government has been issuing Treasury bills, notes and bonds for over 200 years. You, the investor, can buy the debt that the government is selling, and you’ll ultimately collect your capital plus interest. 

The government borrows to fund spending sprees, but also to provide individuals, banks, businesses and global institutions a safe investment option that ultimately helps stabilize the U.S.’ world-beating financial markets.

And for most of the past decade, the appetite for Treasuries has increased along with the U.S. dollar’s role in global transactions and the economy’s resilience. The government issued more debt – not to pay for yachts and Gucci loafers, but to build roads and hire public employees.

So how much government debt is too much? It’s a good question that can’t be answered with a single number.

First, we all know you can have too much of a good thing. I love chocolate chip cookies from the local bakery, but if I eat 10 of those soft, delectable bad boys, I’m gonna hurl.

Government borrowing works the same way. Gross federal debt is about 119% of GDP, about where it was at the end of World War II. High, but understandable after a pair of earth-shattering crises (the Great Financial Crisis and the COVID pandemic).

The U.S. has a lot of capacity to service its debt, too. Government spending on interest rate payments is around 2.4% of GDP, which isn’t excessive relative to history (in fact, it was much higher in the 1980s and 1990s). And government spending on interest rate payments is just 16% of total spending, just above the average of 15% over the past 50 years.

We don’t know if we’re on the second or tenth chocolate chip cookie, though. If people lose faith in the U.S.’ ability to repay Treasury borrowers, then rates could spike higher and we could find ourselves in a nasty crisis. The proverbial financial puke.

This hasn’t happened yet. Far from it, actually – the more Treasuries we issue, the more the world wants to gobble them up. But there isn’t a clear number or limit that is dangerous. We run the risk of crossing that line without knowing until it’s too late – and the U.S.’ debt spirals out of control.

There’s also the question of how productive government borrowing really is. As interest rates have moved higher, the national debt has gotten more expensive to service. The government has had to divert more money to interest payments, and implicitly away from other important projects.

Oh, and we need to talk about the election in the context of the national debt. You’re probably sick of hearing about one side versus the other, so I’ll tell you something both presidential candidates have in common: higher government spending on the horizon. Either side’s policies would push the U.S.’ debt to more than 130% of the economy. This number might cross that scary line in question.

Treasuries serve a lot of important purposes. But is this the right balance of leverage and financial prudence for the economy’s best version of itself? Hard to say.

For now, I’d focus on the scarier things in life. Black cats, spooky ghosts, and surprise visitors at the door. 

Shoot, it’s your broke cousin again.

Thanks for reading! Have a happy, spooky, freeloader free Halloween 👻

Callie

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