In the late 19th century, Alexander Hamilton wrote, “The national debt, so long as it is not excessive, will be a national blessing to us.” Although a great idea in theory, subsequent U.S. governments haven't really stuck with the plan.
Rather, the U.S. economy is built on more than $34 trillion in public debt, with a debt-to-GDP ratio of only about 120%. Perhaps not the blessing our founding fathers once envisioned.
Alarm bells are now ringing with increasing frequency and volume.
Jamie Dimon says we are facing a “rebellion” in global markets because governments are picking up the tab, while Bank of America CEO Brian Moynihan has called the issue I believe it's time to stop praising and do something instead.
other places black swan Author Nassim Taleb says the economy is in a “death spiral,” and Federal Reserve Chairman Jerome Powell says it's past time for “adult conversations” about fiscal responsibility.
And even though the issue is, according to former House Speaker Paul Ryan, “the most predictable crisis ever” (a summary Dimon agrees with), it remains at the top of the political agenda. It's not.
It's also worth noting that it's not one party's job to solve this. This debt was accumulated thanks to spending by both Republicans and Democrats.
The list of presidents who added the most debt by percentage starts with FDR (Democrat), followed by Woodrow Wilson (Democrat) and Ronald Reagan (Republican).
Regardless of who is in charge, it is clear that the public demands action now.
Last year, Pew Research found that “reducing government debt” was a major concern for 57% of the 5,152 people surveyed, up from 45% the year before.
But should individuals who currently have more than $100,000 hanging over their heads when you divide their debt by population need to worry all that much about this issue?
How will that affect their purse strings, cost of living, and savings plans?
How big is the threat?
It depends on who you ask.
If you're talking about the Peter G. Peterson Foundation, the problem becomes much bigger.
This New York-based nonpartisan organization is dedicated to raising public awareness of fiscal issues, with rising government debt among its top concerns.
The group said debt could lead to reduced public spending, a loss of private investors' confidence in the U.S. economy, a shrinking window of prosperity for American households through deteriorating housing and job markets, and a threat to national security. I think it's sexual.
Laura Feldkamp, a finance professor at Columbia University, takes a less dire view.
She encourages the public to use real-world comparisons to understand the context behind the headline-grabbing numbers.
Professor Feldkamp explained: luck: “If we compare the United States to a household budget, we can measure debt by the ratio of debt to income. Debt is approximately 1.3 times the national income (GDP).
“The annual payment of interest on the federal debt is about 4% of the debt. This means that the U.S. government must pay about 5.2% of GDP in interest.
“Federal tax revenues are about 18% of GDP, which means debt repayments are less than a third of income. not.”
A much more difficult question is whether this debt has been accumulated responsibly and will yield positive returns in the future.
JPMorgan President Dimon has concerns about this. As the economy slows, can the government expect production to increase enough to offset investment?
“Instead of focusing on debt levels, we should be asking what the return on investment is,” Professor Feldkamp added. “Debt is a good thing if the government is issuing debt to invest in high-return projects. Otherwise, it will be difficult to repay the debt due to low future productivity. Sho.”
and, deficit mythStephanie Kelton, an economics professor at Stony Brook University, says that public debt in the past has made the economy fairer and wealthier, but scary words like “deficit” have made it difficult for society to really get what it pays for. They point out that it has become impossible to promote financial support. Turns off in a big way.
Professor Kelton's beliefs differ greatly from the doomsaying opinions of some people, but he believes that investing in areas of the economy that are already working well will simply lead to inflation, and therefore without any good cause or future social return. Nor does it advocate unlimited spending.
Could the housing market be affected?
William G. Gale of the Brookings Institution said housing, construction, autos and other interest rate-sensitive sectors would be “disproportionately” affected by attempts to rebalance public debt. luck.
“As government debt increases, interest rates tend to rise,” the authors said. Financial Therapy: Curing America's Debt Addiction and Investing in the Future Said.
“When a government creates debt, it has to raise the money in some way, whether through taxes or money creation. When debt gets out of control, it has historically been easier to create money than raise taxes. However, money creation has been the (false) solution, as it often has more dire consequences in the long run.
Rising interest rates will have a shock impact on young people climbing the housing ladder in the coming decades.
Although many economists point out that the Fed's controversial rate hikes of the 2020s merely normalize interest rates from many previous eras, homeowners and prospective buyers have effectively We've become accustomed to the federal benchmark interest rate of less than 1%.
Rising interest rates not only have a negative psychological impact, but are also bad news for an already unattainable market.
According to the latest National Association of Realtors index, the median household income is $99,432 and the median amount needed to qualify for a home is $105,504.
Does public debt affect America's national security?
This is a concern that experts in this field have had for a long time.
More than a decade ago, when the nation's debt stood at just $19 trillion, America's former chairman of the Joint Chiefs of Staff, Gen. Michael Mullen, said debt was the greatest threat to national security.
Fourteen years later, Ryan told the Bipartisan Policy Center in January that the government will soon be spending more on debt service than it is on investing in the Pentagon.
Dimon added: “This is about world security. We need a stronger military, we need a stronger America, and we need it now. So this is a dangerous thing for all of us. I thought it was.”
Can't the government keep spending?
If the government is accumulating this level of debt and the economy is still surviving – after all, inflation is down, employment is stable, and consumers are in a “decent position.” Some may wonder why politicians can't seem to keep spending without confidence.
There are some problems with this.
The first one is well known. The government has a self-imposed debt ceiling beyond which it cannot spend, and requires parliamentary approval to raise or extend it.
This is a fairly regular occurrence, having happened 78 times since 1960, but negotiations reached the 11th hour last summer as Republicans pressed for a commitment from President Biden's administration to rein in spending.
If the issue resurfaces soon after the 2024 elections, an agreement could become even more difficult.
Another problem is that at some point investors may not want to buy government bonds if they fear that the government will not be able to pay them back.
This is a major concern for Joao Gomez, senior associate dean for research and professor of finance at the Wharton School at the University of Pennsylvania.
“For me, the most important thing for people to keep in mind about debt is that you need someone to buy your debt,” Gomez said. luck. “Previously, we could rely on Chinese and Japanese investors and the Fed. [buy the debt.] All those players have gradually left and are actually selling now. ”
The United States' ability to repay its debt is a concern for countries around the world, which hold $7.6 trillion worth of funds.
The countries most at risk are Japan, which held $1.1 trillion as of November 2023, China ($782 billion), the United Kingdom ($716 billion), Luxembourg ($371 billion), and Canada. ($321 billion).
“If people who have historically been willing to buy bonds from major countries decide at one point, 'Look, I'm not sure this is a good investment anymore,' I'm going to ask for a higher investment amount.” If we are persuaded to maintain this, we could have a real accident,” Gomez said.
He further added: “The moment any government realizes that it cannot sell $1.7 trillion, [annual] If we borrow any more, we would have to make deep cuts to some programs. That would open up a Pandora's box of social anxiety, which I don't think anyone wants to think about. ”