The U.S. public debt now exceeds $30 trillion — the highest amount ever seen in the nation — and it is growing by more than $100 billion per month.
The debt ceiling will have to be raised shortly. Last December, Congress raised the debt ceiling, which should be adequate until February 18. While that date is flexible, since the Treasury can move some money around, the debt ceiling will eventually have to be raised.
It is difficult for most Americans to comprehend $30 trillion. Somehow we need to determine if that debt is excessive and what, if any, problems a large public debt will cause. The traditional rule of thumb was that as long as the public debt was less than one year’s GDP, it should be tolerable.
GDP this year will be in the $23 trillion range, meaning the public debt is 30% larger than one year’s GDP. Already the debt far exceeds one year’s GDP. The logic of that measure is that GDP represents the total income earned in the economy. The ability to carry the nation’s debt is relative to the amount of income earned.
But the real measure should not be the nation’s income, but rather the government’s income. The Federal Government’s income will be about $4 trillion this year, which comes almost entirely from tax revenue.
US Debt-to-Income Ratio: 7.5
That means the government’s public debt is really 7.5 times the government’s annual income. That’s like an individual with a $100,000 annual income trying to carry a $700,000 mortgage. Even with today’s rock-bottom interest rates, that is not sustainable.
There are two problems with a public debt his large.
First, the annual interest expense, which is currently in the $400 billion range, has no governmental program in place to ever pay that debt back. So when the 10- or 20-year bonds that were sold to finance the debt mature, new bonds are sold to repay the existing matured bonds and the debt is rolled over.
Since most of the current debt carries interest rates in the 1% range, when the existing debt is rolled at the higher interest rates — which are coming — the interest payments will skyrocket. Historically, Treasury bond rates are in the 3% range, meaning the $400 billion annual expense will balloon to $1.2 trillion.
Making matters worse, is the fact that the Biden administration wants to spend even more money — which the U.S. government does not have — which will add more to the debt and raise the annual interest expense further. Eventually, we could see 25% or more of federal government spending going to interest payments. That will mean that the United States government will have less to spend on meaningful government programs.
Capital Shortage Could Lead to Stagflation
Second, in addition to the heavy annual interest expense, the huge debt could lead to a capital shortage. If the federal government pulls trillions from capital markets, there would be less available to business for expansion. If business can’t raise sufficient capital in an environment where there is already a labor shortage, economic growth will stagnate.
Since the excess government spending creates huge demand in the economy, businesses’ inability to expand to meet the demand, means that prices will have to rise even further. We could end up with a stagnant economy and rapidly rising prices.
That’s called stagflation and we haven’t experienced that since the late 1970s.
The Biden administration will say that the government debt held by the public is less than one year’s GDP. That is true. That’s because the Federal Reserve has purchased about $9 trillion of the government bonds. They do this by simply electronically printing more money, which increases the money supply and also contributes to inflation.
Bottom Line: US Debt Tops $30 Trillion
Since the Fed purchased $9 trillion of the debt, only $21 trillion is held by the public. But the total debt, regardless of who holds it, is still $30 trillion.
Congress must hold the line on any future spending and work toward a balanced budget. In 1996, President Clinton worked with Congress. He declared “The era of big government is over.” He cut the capital gains tax rate and reformed welfare along with other social programs.
The result was a surplus in the budget for the next four years and real GDP growth averaging 4.5% annually during that time period.
The Dems should follow the Clinton lead and work toward a balanced budget before the public debt gets too large to handle.