Believe it or not, I was not a typical kid. Case in point: as an 11-year-old boy, I became obsessed with the 1992 election, and Ross Perot was my guy. I vividly remember watching him hold up his charts as he warned of the dangers of our national debt. In one of these informercials, I recall Perot describing the debt as the crazy aunt in the basement that all the neighbors know is there, but nobody wants to talk about. At the time, the debt was around $4 trillion. It has since grown nine-fold to over $36 trillion and continues to grow by about $6 billion per day.
For the first time in my lifetime, it appears we have an administration in power that is serious about addressing the national debt and is actually taking steps to try and reduce it. But is the national debt really the boogeyman some portray it to be? After all, although the national debt has grown exponentially, so has the U.S. economy, and we may be wealthier today as a population than we were in 1992 when Ross Perot was warning that the sky was falling. So, is this something we, as Americans, should even be worried about?
Today, I want to share some basic information about our national debt. We’ll examine what it is, who it is owed to, and the possible ramifications of it growing too large.
First, there are generally two components to our national debt. The first is public debt. This is money borrowed from outside sources to fund government operations. The government raises this money by issuing Treasury securities, such as bonds, bills, and notes, which are owned by individuals, sovereign nations, and institutions.
The second major area of debt is intergovernmental holdings. This is a fancy way of saying debt the government owes to itself. A good example of this is the surplus money that was paid into Social Security, which was spent on other things but will still be owed as benefits in the future.
Therefore, if you hold any T-bills in your investment portfolio, or are due social security benefits in the future, some of this money is owed to you.
So what happens if the debt gets too big? Much like a corporation or an individual that takes on too much debt, a government deep in debt must allocate more of its revenue toward interest payments. However, unlike businesses or individuals, the U.S. government has an additional option besides defaulting on its loans. It can simply print more money to cover the interest.
But, as we’ve seen firsthand in recent years, our loose monetary policies have had their own set of consequences: primarily inflation. Governments printing money out of thin air reduces the purchasing power of its citizens, by increasing the supply of money while not increasing the amount of goods and services it can be used on. This hurts both individuals and the broader economy as more and more dollars chase fewer and fewer things. If inflation spirals out of control, it can also shake investor confidence in U.S. debt, leading creditors to demand higher interest rates or the refusal to lend to us altogether.
Having an out-of-control national debt is not a problem unique to the United States. Other nations have recently faced severe economic consequences when their debt became unsustainable. Argentina and Venezuela, for example, both experienced hyperinflation leading to the total collapse of their currencies, widespread poverty, and social unrest. A decade or so ago, Greece had its own debt crisis that threatened the entire European economy and led to deep economic hardship for the Greek people.
Unlike these nations, the United States enjoys a unique position in the global economy that allows it to sustain higher levels of national debt without facing the immediate crises that have plagued other nations.
Because of the perceived strength of both the US dollar and our economy, creditor confidence remains relatively high. However, while this “longer leash” gives the U.S. more flexibility, it is not limitless. If debt continues to grow unchecked, it could eventually break the US economy. For the sake of future generations, I hope we take action now – before it’s too late.