U.S. Government Debt: A Historical High and Its Implications
U.S. government debt is now the highest in history. The last time the U.S. was in this much debt was during World War II, driven by record military spending. It’s now more than $34 trillion and keeps climbing. According to some experts, U.S. debt could balloon past the point of no return in 20 years, potentially sending the world’s biggest economy into a financial crisis. So how does the U.S. get out of this, and what happens if it can’t?
Understanding Debt Measurement
We measure debt by comparing U.S. economic output to the government’s debt owed to the public. Based on this measurement, the U.S. is at about 96% debt-to-GDP.
Government funding comes from taxes from their economic output, which are needed to fund things like schools, roads, the military, social services like Medicare, Medicaid, Social Security, and even interest on the debt. When we spend more than we earn, we must borrow, causing the debt to skyrocket.
How Did The U.S. Get Here?
In the early 2000s, debt began to build because of military spending from the Afghanistan and Iraq wars. It then accelerated with the 2008 financial crisis: markets crashed, people lost jobs, and there were fewer taxpayers. After that, spending programs increased, the 2017 tax cuts reduced tax revenue further, and finally, the pandemic hit. The U.S. needed to borrow even more money to cover COVID-19 relief spending. All of this creates a deficit, which is when you spend more than you earn and have to borrow the difference, causing the debt to continue accelerating.
Who Is the U.S. Borrowing Money From?
First, we need to understand how it works: every time the government needs to borrow money, it doesn’t turn to a bank like you or me. It turns to the public market, borrowing money from the public. Individuals, organizations, and institutional investors can lend money by buying notes, treasuries, and bonds. These can be purchased at banks, brokers, and directly from the government. Think of it as a promissory note from the government that it will pay you back with interest. That interest is called a yield. Investors buy these bonds because, historically, the economy and currency have been strong, making them a safe way to earn a little bit of money on their cash.
The Growing Debt Problem
Right now, U.S. debt is rising at an alarming rate. We’re borrowing too much, which makes lenders nervous. When the U.S. borrows more, it must issue more promissory notes. If investors fear the government can’t keep up with payments, it begins to be seen as an untrustworthy borrower, and investors may be less inclined to lend money, especially at a low yield, making it less attractive.
To sell debt, the government will have to raise the yield, paying the public higher interest to make the debt attractive to investors again. This is where things start to get messy. If investors can get a low-risk, higher yield from government bonds, they’re less likely to invest in higher-risk places like the stock market or household debt like mortgages and car loans. To attract these investors back, the interest rate on debt for you and me also goes up. A study from the University of Pennsylvania found that if we continue borrowing at this rate, we will be past the point of no return in 20 years.
This is because the interest on government debt would accumulate so much that it would be impossible to pay it all back. It’s like when you default on your credit card because the interest keeps piling up and you just can’t catch up. This is what we can refer to as a bubble.
How Does The U.S. Get Out of This?
One way is through an economic boom. This is how the U.S. got out of it after World War II. The war ended, military spending slowed, and the U.S. experienced rapid economic growth. Something similar could happen again. AI could lead us into increased productivity and another economic boom, but some experts believe that this time around, it’s less likely. We have a large aging population that will require Social Security and healthcare longer.
Another way out is for the government to print money to pay back all of that debt. It sounds like an easy option, but it’s very risky. Increasing the money supply leads to a supply-demand problem, making the dollar less valuable and leading to inflation. This could seriously shrink the wealth and purchasing power of people like you and me.
The third way out is for the government to hike taxes significantly to pay for all this debt. Those of us who will pick up the bill for that will be income earners in 15 to 20 years from now, and even then, it might be too late. That’s why policymakers often engage in negotiations to raise the debt ceiling so the government can continue borrowing to meet its obligations.
Let’s face it. It’s not likely the U.S. government debt will be paid back anytime soon. So how can we prepare for this possible crisis?
Can AI Industrial Revolution Bail the U.S. Out of This Debt?
The prospect of an AI industrial revolution potentially bailing the U.S. out of its debt is uncertain. While AI technologies hold promise in boosting productivity and driving economic growth, there are challenges to consider. The transition to AI-driven industries may not immediately address the debt crisis, especially considering the significant investments and time required for adoption.
Additionally, the impact of AI on employment and income distribution remains a subject of debate, with concerns about job displacement and widening economic inequality.
It may require a multifaceted approach involving policy reforms, strategic investments, and fiscal discipline.
Preparing for a Possible Crisis
Some experts recommend investing in assets that appreciate and aren’t impacted by inflation, like real estate or certain types of bonds such as TIPS or I Bonds. Considering international markets from countries with strong balance sheets could also be beneficial. It’s hard to predict because we haven’t really been here before.
Feel free to share your thoughts or any strategies you're considering in these uncertain times!
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