Articles about the National Debt are usually very controversial and I expect this one will be no less contentious. There is a general consensus among Americans that an expanding level of debt creates an adverse future for our country and our children. While I agree with this sentiment, to a certain extent, there are economists who believe debt is not necessarily detrimental to our economy, this column is dedicated to exploring this thesis. For starters, there are two types of debt that make up the National Debt, public debt or money we owe outside the U.S. and private debt, commonly called intragovernmental debt.
So how does an increase in the National Debt impact our economy?
The best answer is, the economy and all of us benefit from deficit spending, in the short run. We get infrastructure improvements, Medicare, Social Security, National Parks like Yellowstone, interstate highways and more. This type of spending increases employment, consumer confidence and consumer spending, these three factors boost GDP and as a result there is a greater level of prosperity in America.
However, increasing federal debt will lower demand for U.S. Treasuries which would raise the interest rates and overall that would likely have a negative impact to the growth of our economy. The biggest problem with debt is the ballooning of interest payments or the servicing of the debt, in a low interest environment, this is not a huge issue but as interest rates increase, debt becomes unsustainable.
Here is where this topic becomes controversial because there is a common thought process that that our current $22 trillion dollars of debt is catastrophe.
Americans have lived in fear of the exploding National Debt since John Travolta was doing the disco in the 70’s. The highest level of debt in America was after World War II, when it reached 123% debt to GDP.
So while $22 trillion seems like an enormous sum, to the wealthiest country on the planet, it is not. Consider that China, Japan, Argentina and most of the countries in the Eurozone have significantly higher debt levels to GDP than America.
Governments around the world still buy U.S. Treasury’s because they are confident we can pay it back and if other nations are buying our debt, it means we are a long way from being insolvent.
Whys is private debt not a problem?
The most commonly cited statistic is the ratio of Debt to GDP, which is currently 111%. Keep in mind that more that 25% of our debt is money we owe ourselves (intragovernmental debt) for things like social security and money spent in 230 federal agencies. Any accountant will tell you that this is an accounting entry, it is both an asset and a liability, so it cancels itself. But there is still lots of debt to the tune of $17 trillion outside of our own debt.
You are probably asking why this is not a problem.
It is not so simple but consider how we report the National Debt to GDP, we take accumulated debt for years and then measure it against one year of GDP growth. Why should we measure it against only a single year of revenue? The debt has been mushrooming since 1980 and as we spend money in America, we have assets that our country has accumulated as a result.
As a matter of fact, what is a little know secret in America is that the Federal Reserve keeps track of our assets and as of November 27, 2019 in the Federal Reserve report under U.S. Reserve Assets (Table 3.12), our net worth as a country was quite considerable. Since we are all tax payers and we are consistently told that we own the National Debt we also own the assets, which are currently worth $128.8 trillion dollars. These long term assets back up our liabilities, something that no other country in the world can match.
Let me quote Jamie Diamond, the Citibank CEO, “Government solvency isn’t about paying off debt it’s about affording these payments and rolling over maturing bonds. Currently, annual U.S. interest payments represent just 9.7% of tax revenues, lower that any time the 1980s and 1990s, when they peaked at 18.4%. If debt didn’t doom us then, why would it now”?
Of course I could say that interest debt is not a problem due to the historically low interest rates we are enjoying these days, but that may not always be the case. Many readers can recall the days when interest rates were in the mid double digits but today the average Treasury note is around 2%. Also, I will ask you to keep in mind that recently the 10 year note was cheaper than the 2 year Treasury note. So to the U.S. Government and our revenue, rates only matter on the date they are issued, the length of maturity is about 7 years so these short term movements we have witnessed recently are not a huge concern.
As I have said in my presentations on the American economy over the past nine years, debt is not an immediate problem, it won’t impact your business, consumers will not stop spending and retail business will not collapse with an expanding national debt. However, if we continue to spend with abandon and interest rates spike to levels of the late 1970’s and 1980’s, if interest payments continue to expand and if investors stop buying treasuries due to our high debt levels, then it will be time to worry. In all my research and work in this area, I don’t see that as a possibility at this time.
Today America can borrow money for 10 years at 1.91%, foreign countries around the world, literally, stand in line to buy our debt at this low rate. Contrast that with other nation’s overnight borrowing rates, Mexico is 7.8%, Russia is 7.1%, China is 4.2% and the Ukraine is 16.5%. Investors buy U.S. treasuries because they are safe, other nations bonds at significantly higher interest rates are not attractive. America is the gold standard for bonds, we are wealthy, we have assets and our government is the most stable on the planet.
So my bottom line is this, the National Debt Clock is a nice distraction, designed to scare the heck of all of us. Worrying about the debt over the past 30 years has not brought you peace nor has it helped to lower our bills. Understanding the realities of our debt and assets gives us more clarity on how we approach future of our great country and our children. For most of my readers who have attended my speeches on the economy know that I have discussed this subject at length, your future business and your continued success will not be swayed by our National Debt.