Putting the National Debt into Perspective and Why It Matters
In the wake of present-day economic destruction, getting lost in the shuffle is the magnitude of our federal rescue plan. It is peculiar to think that we find ourselves in a current state where the word trillion is becoming such a commonplace measurement. While our debt is north of $25 trillion, it is a dangerous to think that the national debt is something so large and abstract that it does not concern the everyday American. Nothing could be further from the truth, and framed correctly, our national debt is very comprehensible.
For starters it is paramount to fully understand the significance of our national debt, and that it is in fact, OUR debt. The United States Department of the Treasury borrows money for government spending by issuing Treasury bills, notes and bonds ranging from 4 weeks to 30 years. According to the Treasury Department, as of December 2019, 74% of all US debt is owned by American households, pension funds, and institutions. For reference, China the second largest foreign debt holder, currently holds approximately 4% of all US government debt. Japan, the largest foreign debt holder currently holds 5% of all US government debt.
As the majority owners of this debt, we should make no mistake that this is our problem. Fundamentally, the trillions of dollars that are being thrown at this pandemic will need to be paid with our future taxes. One must understand that the government’s obligations in the future are truly the obligations of the American people. If you divide our national debt by the number of taxpayers, that equates to over $200,000 of debt for every tax paying American.
It is also critical to understand that defaulting on this money or wiping it away, is simply not a viable option. In doing so, the default would wipe out roughly $18 trillion dollars of wealth from the American people that own the Treasuries in the form of an asset. Additionally, the default of $7 trillion of foreign owned Treasuries would precipitate a collapse in the dollar itself.
It is my great fear that the sheer size and incomprehensibility of the word trillion is inhibiting the American people from grasping the magnitude of this situation. In fact, for someone who deeply enjoys economics, it is hard to satisfyingly wrap my head around our current affairs; $25.2 trillion dollars in debt, $2.2 trillion CARES Act, $2.3 trillion in Federal Reserve balance sheet increase, 118% Debt-to-GDP, and a rapidly deteriorating outlook.
One way to meaningfully look at our balance sheet is to put it into a perspective with which we can relate. If we reduce the scale of our balance sheet by 35,000,000 to 1 and round some numbers, we are left with something that resembles a household budget albeit in disarray. At this ratio, the United States currently would have an annual income of $100,000 and current debt amount of about $714,000. If we consider the amount of unfunded liabilities (Medicare/Social Security/VA benefits, etc.) that we are expected to pay in the future, tack on another $4.2 million needed for “retirement”.
Now that we have the perspective in middle class terms, what would you say to your great aunt that finds herself in this same financial situation? As a financial advisor, I meet these scenarios with no infrequency. The difficult part of that conversation is that there is no easy way out. In fact, there are only two real options. Spend less than you earn, or somehow increase your income. Even though the government speaks in trillions, their options are no different. In 2019, the federal government ran a deficit of $984 billion. At the time of writing, the United States government had already spent $2.6 trillion more than the entire 2020 budget.
Hopefully when you look at these numbers you understand that we are at a critical juncture. Even though our balance sheet speaks in trillions, it is not an excuse to think that our public debt will have no repercussions. Getting out of this hole will mean less government spending, higher taxes, and some form of inflation in the future. Our role as a global financial leader will depend on it. Every dollar that we as a country borrow, in turn, borrows from our future growth as a nation.
We must hold our government accountable for the money that it is spending and scrutinize every line item. Politicians on all sides benefit when emergency bills are passed, and huge swaths of money are allocated in an expedited manner without scrutiny. Be careful not to interpret bipartisan support as sudden moral decency. Rather it is a rare opportunity to quickly allocate large swaths of unexamined money to special interest groups. This exploding debt will have a concrete impact on our future America. All Americans should take an active interest and critical stance on the money being spent. Statistics were gathered via US Treasury Department and usdebtclock.org.