By Tim Courtney, Chief Investment Officer
Does the national debt matter? Considering their actions, neither political party seems to think so. The U.S. now pays more than $1 trillion a year in interest to simply service existing debt.1 Crossing this threshold has meant that we have seen more recent news headlines about our burgeoning debt, but we’ve also heard a lot about the debt for decades now. Life goes on, and the debt continues to pile up. Our national debt recently passed $35 trillion2 and is over 100% of our gross domestic product (GDP).3 Will we be talking about debt in terms of quadrillions of dollars in the coming decades? Should we care?
We know that if we as households had the same level of fiscal discipline as our government, the consequences to our finances would be immediate and disastrous. Of course, although it is made up of households, a nation operates on a completely different scale and time horizon. A nation also manages its own currency, so a greater amount of national debt doesn’t necessarily create a present crisis. And debt is not a universally negative thing; deficit spending to obtain a productive asset or to improve our citizens’ capabilities are good things that can come from debt.
However, it is probably a safe bet that most Americans would strain in vain to find $1.7 trillion worth4 of new assets and improved capabilities in 2023. Instead, when the vast majority of those dollars were spent they had a one-time impact with no future benefit.
This is the true cost of our spending deficits and growing debt. We pull growth from the future to enjoy it in the present. The interest on the debt begins to bite into spending on other items that we may need in the future. Increasing debt earmarks future dollars that could have been spent on something beneficial for the economy to be used for the repayment of debt instead. The debt slows our expected future growth rates and increases our expected future tax rates and liabilities, all else being equal.
Some economists have promoted a model they say can deal with the debt issue. Because the U.S. controls its own currency, they say we should stop borrowing and simply print the money we want to spend.5 Of course, that solution (which isn’t new) introduces the cost of inflation. Proponents reply that inflation can be controlled by cutting spending and broad tax increases, however they were oddly quiet about these inflation fixes while inflation jumped 20-25% higher since 2020.6
While neither leaders nor voters have been able to bring about fiscal discipline, the final say in all of this will come from markets. The market still views the United States as the world's lone superpower, its largest economy and the issuer of a currency that is demanded worldwide. This gives the U.S. quite a bit of grace. However, there is still a cost to our debt, and that cost in the immediate future is slower expected growth and, in decades to come, may be higher interest rates demanded by the market.
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