$30 Trillion!

By: Dr. M. Ray Perryman
Published in syndication February 09, 2022

The US national debt now tops $30,000,000,000,000. It's a whopping number which far exceeds gross domestic product (as it has for almost a decade). While it isn't a cause for panic, it's also not to be ignored.

A common question is - "who are the creditors?". Some of the money is simply the government owing itself (such as the Social Security Trust) and some results from promises by politicians which could change over time. Federal Reserve Banks and private domestic investors also hold a large segment. Together, these shares are about 70% of the total. The remainder is held by foreign governments, banks, and investors. The governments of China and Japan each hold over $1 trillion, with many countries holding hundreds of millions.

As long as investors are confident of repayment, they will keep buying US treasuries. New debt retires old debt, and the cycle continues. The global standard for safe investments has long been US treasuries, and demand for them will persist and likely grow in an increasingly uncertain world (unless, of course, the games that Congress plays with the ceiling become more serious).

These are the ample reasons not to overreact. We owe ourselves to a large extent, and it's a common practice for foreign governments and investors to hold each other's debt. Nonetheless, it needs to be systematically addressed.

One concern is how rapidly the debt has accelerated. Federal debt reached $1 trillion in the early 1980s after two centuries, and it wasn't until the Great Recession that it exceeded $10 trillion. Only nine years later, it topped $20 trillion. Just five years after that, we're at $30 trillion. The pandemic caused a spike, much of which was essential to keep families, small businesses, and major industries viable. The crimson ink during the prior 11 years of prosperity is another matter entirely.

Debt requires interest payments. With ultra-low rates, this is somewhat manageable, but the cost will escalate as rates increase. Much of the debt is short term in nature; thus, new bonds with higher rates will quickly be required. These additional outlays limit flexibility to meet legitimate governmental priorities, such as national defense, infrastructure development, and public health and safety. Another issue is "crowding out," as savings dollars are diverted away from banks and other private entities which relend the money in a productive way, thus driving prosperity and innovation.

A more sustainable fiscal strategy requires two exceedingly rare things in Washington - bipartisanship (as it necessitates changes in both spending and taxes) and a vision beyond the next election (as the most viable approaches are multi-generational). Need I say more?! It's not an immediate crisis, but it needs to be rationally attacked sooner rather than later. Stay safe!