A reader asks:
Have you ever written about the national debt? That’s what gives me pause. It is pushing 40 trillion dollars and it looks like it will end badly. Of course, I was saying that $10 trillion is a fascinating number, and things have only gotten better since then.
People were worried long before government debt reached $40 trillion or even $10 trillion.
Inside SnowballAlice Schroeder recounts how Warren Buffett’s father, Howard, repeatedly railed against government debt and budget deficits in the 1940s.
Howard once said: “America could not spend borrowed money indefinitely without consequences.” He preferred a return to the gold standard over the fear that America would end up like Weimar Germany, with people carrying wheelbarrows full of money onto the streets due to hyperinflation.
At that time, the state’s debt was 50 billion dollars.
One of my favorites is Time Magazine’s 1972 cover story:
It sounds like it could have been written today:
Debt service is now the third highest public expenditure, surpassed only by defense and education spending; Most of the money goes to banks, which are the main buyers of bonds that governments at all levels sell to cover their deficits. Moreover, the debt acts as a means of falsely redistributing income by diverting tax money paid largely by the poor and middle class into the pockets of the wealthy who hold bank escrow accounts or stocks.
When this cover was published, the state’s debt was approximately $430 billion.
Today, the total is rapidly approaching $40 trillion.
Since the Great Financial Crisis, there has been a never-ending parade of people screaming at the top of their lungs about the dangers of government spending, debt, and deficits.
None of them have been proven right, but the debt continues to rise.
Wall StreetJournal It shows that the ratio of public debt to GDP is 100% for the first time since the Second World War:
Is this the case of the boy who cried wolf again? Or will ridiculously high government debt levels actually cause the crisis that many people have been warning about for decades?
Here’s the trillion-dollar question: Why did none of the government’s debt crisis predictions come true?
I like how Steve Eisman describes it this way: Campus and Friends:
I completely agree here.
There are two big mistakes people make when predicting disaster by looking at US government debt levels:
1. Confusing US government debt with household debt. Government debt is not like a mortgage that must be repaid. As long as the economy continues to grow, debt levels will likely continue to rise.1 The US government also has the ability to print the global reserve currency. You can’t print any more dollar bills in your basement.
2. The obligations of the state are the existence of another. Treasury bonds are bonds held by pensions, insurance companies, fund managers and households. This is the world’s largest, most liquid bond and there is no alternative.
I will not give oxygen to the doomsday narrative that government debt will cause a collapse in the dollar and the end of the financial system as we know it. These people always say this and they are always wrong.
So what to want Will it make me worry about government debt levels?
The biggest risk of large deficits and government spending is inflation.
When you consider the amount of government spending during the pandemic, it’s almost surprising that inflation wasn’t even higher before falling to the long-term average:
Publicly held government debt has grown from about $22 trillion at the end of 2019 to more than $39 trillion now. However This isn’t the 1970s whatever happens. If inflation remains high, there will be good cause for concern.
Ever-rising interest rates will also be a cause for concern.
If you look at the Treasury yield curve, you will see that bond yields have risen sharply above the Covid floor:
We are now back to long-term averages in interest rates.
However, in the days before 2008, these returns were thought to be low.
Another concern is the increasing share of interest expenses in the government budget. Here’s a good look from JP Morgan:
Interest expenses now exceed the defense budget.
The good news is that the ratio of interest expenses to GDP is at 1980s levels:
The bad news is that it took off like a rocket and rates were much higher back then.
Is high government debt destined to end badly?
I don’t think this is a foregone conclusion. Despite decades of warnings, it has yet to turn out badly.
Does this mean that never-ending spending is a good thing?
Of course not, especially if it leads to higher rates and inflation. It’s also not good if interest expenses affect other government initiatives.
Is there a line at which the government debt crisis will automatically kick in?
Nobody knows.
Barry Ritholtz joined us on Ask Compound this week to discuss this question:
We’ve also covered questions about money and happiness, how to put away a pile of cash for a down payment, when to sell concentrated stock positions, and how much you should have in your company’s stock.
Further Reading:
When Does the Federal Deficit Matter?
1Unless we want austerity. Ask Europeans how this is going for their economy.
