U.S. Debt - Can We Fix A $30 Trillion Problem?
A few weeks ago I wrote about the inflation we are experiencing and the connection to the Federal Reserve printing money and taking on loads of debt as a nation. Since 2008, US debt as a percentage of GDP has ballooned from 40% to nearly 100% - the highest levels we have seen since the end of WWII when the US issued all those War Bonds. If you want to give yourself anxiety, check out the debt clock, which shows in real-time the growth of our national debt. I found myself staring at the “debt per taxpayer” block waiting for it to tick up – I guess I like torturing myself a little bit.
While the debt levels in the country are a tremendous concern, there are two larger themes at play that give us some hope for the future.
#1 – Good debt vs. Bad debt – We can all agree that there is a difference between credit card debt that was racked up from vacation and debt incurred to start a business. One is an investment in the future and the other is a discretionary purchase. If that is the case, then it is important to know exactly how the U.S. spends its resources.
In the U.S, the majority of our annual spending goes to fund Social Security, Medicare, and Medicaid. This puts money back in the hands of consumers, who use that money to buy for example, a meal at a restaurant, which in turn stimulates the economy. The same could be said for the stimulus funds and unemployment paid out during the Covid-19 pandemic. Was that done perfectly? Absolutely not. But it did give money directly to people (known as M1 monetary policy), which historically has been the best “investment” a government can make when trying to navigate an economic crisis.
#2 Adaptability – It’s frightening to see the “projections” for U.S. debt levels over the next 20 years, which show a graph up and to the right.
CBO.gov
But, the U.S. has an extensive history of adapting when we head too far in one direction. For example, after the U.S. took on high levels of debt to fund WWII, taxes were raised and some spending programs were cut, all while stimulating the economy through other programs that made buying homes, cars, and other goods more accessible to consumers. In the sharpest reversal in debt levels our nation has ever seen, a chart that was going up turned quickly south.
JPMorgan Guide to the Markets
This time is certainly different. We have debt for very different reasons, most of which will take much more thought to fix. It will probably take smaller measures of spending cuts and tax raises, similar to what we saw in the late 1990s before the DotCom crash and Financial Crisis forced policymakers to change course.
However, if done correctly, we can grow out of this debt through a mixture of slow economic growth, prudent tax policy, and very thoughtful spending plans. We have done it before.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.