Putting the National Debt in Context

Headlines periodically sound the alarm about the growing balance of the US national debt, especially in election years when this issue is leveraged to make political points. After all, the balance of the US national debt is now above $35.3 trillion – over 120% of the country’s GDP – and it continues to rise. While that is an unfathomably large number, it doesn’t necessarily suggest a looming disaster or even a problem for investors. The recent expansion of our debt, with almost $20 trillion in new debt added over the last 15 years, hasn’t changed investor appetite for US debt.  

The reality of our national debt differs from public perception. It’s true that our debt needs to be managed over time, and ideally reduced from current levels, but it’s also important to acknowledge the role that debt has played throughout the history of the US to finance economic expansion and smooth out economic crises. By reframing two common metrics for measuring the US debt levels, we can gain insight into our current deficit and see why it’s sometimes said that “everyone seems to worry about US debt, except for its creditors.” 

Since the inception of our country, debt has been a key tool for financing economic growth and navigating production needs during periods of wartime. Debt began accumulating during the Revolutionary War and continued to grow until the government made a push to reduce debt levels in 1835. It’s worth noting that this period of debt reduction wasn’t due exclusively to good federal budgeting, but rather, the deficit shrank due to the sale of federally-owned lands and assets. That effort didn’t last though, and the national debt expanded by over 4,000% through the course of the American Civil War, reaching almost $3 billion by 1865. The debt grew slowly in subsequent decades before ballooning again as the US financed involvement in WWI and WWII. Debt reached dizzying heights of $256 billion by 1950 but then abated and remained fairly steady until the early 1980s.   

From the 1980s through the present day, the national debt has expanded significantly to its current level of $35.3 trillion. The Afghanistan and Iraq Wars, the 2008 Great Recession, and the COVID-19 pandemic were significant catalysts for this expansion. From 2019 to 2021 alone, spending increased by about 50%, largely due to the pandemic. Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment all contributed to sharp rises in the national debt. Many economists argue that the ability of the US government to borrow money and support its citizens during crises prevented economic downturns from becoming even more severe and bolstered economic recovery. 

Concerns about national debt levels often cite a metric that compares current debt to current GDP, with GDP representing the total value of goods and services produced by a country each year. Historically, a debt-to-GDP ratio of 80% has been considered quite high, but developed countries in Europe, North America, and Japan get away with higher levels of debt because their economies are more resilient and productive. US debt is currently above 120% of GDP, which, understandably, has caused some anxiety for debt-watchers. However, GDP might not be the best metric to use.  

If we translate GDP into household terms, this would be similar to a country’s annual income and salary. When thinking about traditional mortgages, one of the most common forms of household debt, a bank is often happy to offer a $1 million mortgage to a family that earns more than $250k per year. The bank looks at the bigger picture, which includes household income to make mortgage payments, but also looks at total net worth and the ability to pay back the debt with other assets.  

In the United States, current household net worth is over $150 trillion, which is close to five times the size of the nation’s debt.[1] Viewed with that lens, the debt level does not seem as troubling. The US is a very wealthy country, both in assets and income from ongoing tax revenue. The government itself also has more assets than many people realize. If all the US government land, buildings, and natural resources were combined, the country would likely have more than $200 trillion in assets versus the current $35 trillion in debt.[2] Rather than measuring debt as a percentage of GDP, which is primarily an income measure, measuring debt against total assets paints a far more solvent picture. 

Another question raised during periods of concern about the national debt is understanding who actually owns the outstanding debt.  

For starters, more than 30% of current debt is owned by other arms of our own government or central bank. The Social Security Administration Trust owns roughly 9% of current US debt, with an additional 20% held by the Federal Reserve.[3] Since this debt is just money the government owes itself, it has minimal effect on overall government finances. More than 40% of US debt is owned by US savers, pensions, mutual funds, and financial institutions, who hold Treasuries for safety, yield, policy requirements, or regulatory reasons. While it’s true that more than 20% of US debt is held abroad, it’s not heavily concentrated in any one country.  

China is the second largest foreign owner of US debt, and concerns occasionally arise about this financial relationship in light of geopolitical tension. There have been ideas put forth that China could weaponize US debt by rapidly selling its US Treasury holdings, causing financial instability and a spike in borrowing costs. This risk seems unfounded since China has been reducing its position in Treasuries for years without disruption to the US debt market. China is the second-largest foreign holder of US debt, behind Japan, and it currently holds $780B of US Treasuries, or roughly 2% of outstanding debt.[4] 

The national debt is certainly a large dollar figure and should be closely monitored as it continues expanding, but it doesn’t pose any imminent risk to the economy or the stock market. This doesn’t mean it won’t continue to pop up in headlines or be debated during the upcoming election cycle, but it isn’t a concern that has any material impact on the market. In fact, the International Monetary Fund recently reviewed the financial position of the United States and concluded that our current debt levels are financially sustainable. That said, a related risk was called out with regard to the political landscape and brinksmanship of a self-imposed debt ceiling that must be approved by Congress. 

Just as we are comfortable with our clients carrying a mortgage balance that exceeds their annual income, provided it’s coordinated with a financial plan and a solid net worth, we are not concerned at the moment about the financial position of the United States. Given that Treasuries are one of the safest and most liquid assets in the world, and the US remains the most productive economy by net worth and GDP, it’s unlikely investors will lose their appetite for US debt any time soon.

Resources: 

[1]  Financial Accounts of the United States US Federal Reserve  

[2]  Executive Summary to the Fiscal Year 2023 Financial Report of U.S. Government Treasury.gov 

[3]  5 facts about the U.S. national debt Pew Research Center 

[4]  Major Foreign Holders of Treasury Securities Treasury.gov