The National Debt

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Several readers have asked why the market and just about everyone in authority in government and in business seem so unperturbed by the announcement that the federal government is now some $22 trillion in debt.  One reader, who describes himself as “just another working slob with credit card debt,” adds a little humor and sarcasm to the question:

“For my entire adult life I’ve been listening to Republicans and ‘brilliant’ business mavens warning us: THE NATIONAL DEBT! THE NATIONAL DEBT!  Now they are as silent as mice behind the national wallboard.  I myself lose sleep if my Amex bill is one day late. And here’s the market, climbing to historic highs, as if the national debt was nothing more than some spilled Saltine crumbs on the floor.  What gives???!!!

Good question!   Actually, he asks two questions: one about the hypocrisy of politicians and business people who complain inconsistently about the evils of debt; the other about the size of the debt outstanding and implicitly what it might mean for the economy and its financial markets.

As to the first question, it is only fair to note that the hypocrisy goes beyond Republicans and business people.  It is all but universal.  Republicans and business people say little about the national debt when the latest additions to it come from their own policies –– in this case tax cuts.  In the past, Democrats have decried Republican-based debt, even as they have ignored their own contributions to it.  The only reason Democrats are not pointing at the red ink this time is because their agenda would likewise involve huge additions to debt.  This time, they are arguing not against debt per se but that the increase in debt is in service of the wrong cause.  Republicans and Democrats, always and ever, have sought to further their own interest –– or rather those of their constituents.  Each has used the outcry over debt to discredit the other.

Having pointed this out, it would be useful now to gain some perspective on this huge number.  Twenty-two trillion dollars would certainly make for a daunting Amex bill. It’s a sum that goes beyond what any individual could comprehend, much less deal with.  But, of course, the $22 trillion debt does not belong to any one individual.  It belongs to the entire nation, and our nation has considerable resources.  The $22 trillion differs only a little from the income the United States produces every year.  The country’s gross domestic product (GDP) in 2019 seems set to come in at a little over $21 trillion.  The federal government seems set to take in revenues this year of $3.4 trillion. Theoretically, then, the U.S. –– meaning all of us as a nation (but not the government coffers)––could just about pay off the entire $22 trillion debt in one year if we directed our entire income—the gross national product — to that one purpose.  Similarly, Washington — the U.S. Treasury — would take about 6.5 years to pay it down if it spent the money on nothing else.

Of course, neither the nation nor its government would do such a thing.  Each has other obligations.   But the size of the resources against which the $22 trillion debt stands does take some of the fear out of that otherwise immense figure.  To make it more personal, it might help to think of these relationships as a family that carries a mortgage on its home equal to 5 to 6 times the family’s annual income.  The household can’t dedicate all its income to pay down the debt quickly, much as it would like to, because it has to eat and clothe itself, among other things. But the circumstance of a mortgage of that relative size is hardly uncommon and hardly draws squeals of outrage when it becomes known.

In one respect, the $22 trillion is even less outrageous than the family with the heavy mortgage.  Unlike the family, the government never has to pay off its debt. As individuals who have obligated themselves to pay off the mortgage approach the end of their lifespan, creditors will refuse to lend them money, and they will have to pay down the debt they already have.  But presumably, the country never dies.  As debt comes due, the government can borrow anew and use the new funds to pay off the maturing debt.  It has been doing this for decades, centuries actually.  Because the U.S. keeps growing and thereby expanding the resources available to its government, Washington can always get credit to retire old debt and even expand the amount outstanding.  The huge debts run up to fight World War II, for instance, amounted to 130 percent of the country’s GDP at the close of hostilities, relatively a lot higher than today’s figure.  It all came due in the 20 to 30 years after the war’s end.  Washington paid it off with newly borrowed funds.  It could get the funds because its lenders, mostly the American public and a few foreign governments, could envision America’s continuing economic growth generating the resources necessary to shoulder the new debt.

Problems arise when the growth of debt outstrips the perceived expansion of the resources behind it.  In this situation, creditors would become reluctant to lend, and Washington, instead of continuing to “roll the debt forward,” would then have to repay it.  This is similar to the different borrowing power and inclinations of companies that are growing fast or slowing down. Lenders eagerly line up for a company that is growing at, say, 10 percent a year or better, concluding that such growth makes it easier for management to pay off the debt.  Because the borrowing presumably enables the company to invest the borrowed funds and thus secure continued rapid growth, it makes sense for management to borrow — indeed, a reluctance to borrow would run counter to the company’s interests.  But the opposite is true for a company that is growing slowly.

This is hardly a complete picture of what is an indisputably complex matter, and it in no way suggests that debt is a good thing.  But it may help explain why the market and so many others have resisted the hysteria in the headlines.  They believe — rightly or wrongly — that the tax cuts that have added to the national debt will sustain the country’s necessary growth.



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