The US National Debt: Debt or Alive?

WHAT YOU NEED TO KNOW

The US debt is near its highest level in history and on track to grow. Neither political party currently seems intent on making it more sustainable. What risks does that present for the US economy and for investors? How can the debt issue be solved and what does that mean for investment portfolios?

Executive Summary

•  The national debt has reemerged as a major market concern. While the trajectory has appeared unsustainable for quite some time, higher interest rates and a rising interest burden have brought it to the fore, prompting questions of whether it will precipitate a crisis in the medium term.
• We recognize the risks to the economy and the market but are not alarmists. We believe there are still solutions and time to address the underlying issues surrounding the national debt.
• We foresee a combination of factors putting the debt on a sustainable path—a mix of productivity growth, moderate inflation, spending cuts, and tax hikes should be enough to avoid a major crisis.
• Yet it may still require a mini-crisis in the bond markets—similar to the early 1990s in the US or 2022 in the UK—to spur Congress into action.
• Because the US issues its own currency, it does not face the same budgetary constraints as a household or firm would. However, it is still hemmed in by inflation and potential political repercussions.
• The US enjoys an “exorbitant privilege” as the global reserve currency and preferred destination for international savings. This gives its policymakers more flexibility than other countries would have when it comes to managing debt.

“The federal government is on an unsustainable long-term fiscal path that poses serious economic, national security, and social challenges if not addressed. And the longer we wait to act, the more dire the consequences will be on the economy and the public.”

—Government Accountability Office (GAO), a nonpartisan federal agency that serves as the country’s chief auditor, February 2024

We agree with the GAO. But while yellow warning lights may be flashing, alarms are not sounding … yet. We have concerns and see the market risks but believe there are still solutions and time to address the underlying issues.

Why are people increasingly worried about the national debt?¹ To be fair, they’ve always been worried. When the National Debt Clock was installed in New York City in 1989, it had surged from 25% of GDP to 40% over the previous decade and totaled a mere $2.7 trillion. Today, a US debt figure that low would barely register. What’s more, at $27 trillion, the national debt has spiked since the global financial crisis, rising from 35% of GDP to almost 100%. And according to estimates from the Congressional Budget Office (CBO), the debt-to-GDP ratio is set to continue growing from here, reaching 166% in 2054 (Display 1).²

¹ Throughout this paper, when we talk about the national debt, we will generally be discussing the amount held by the public, as opposed to that held by government entities. Since interest payments from the government to itself effectively pass money from the right hand to the left, they’re less important to debt sustainability.
² While we show specific paths the debt can take from here, the future remains highly uncertain when looking decades ahead. It would perhaps be more accurate to show simulations with many different trials, each taking a different path and fanning out, similar to what we show in our long-term capital markets projections and wealth forecasts. Bloomberg Economics did something along those lines earlier this year, showing the debt to be unsustainable in 88% of simulations (though we’d take some issue with its definition of sustainability). However, our goal in this paper is to talk about the workability of specific solutions, thus we take more of a scenario analysis approach in this paper rather than a simulation approach, while recognizing the inherent uncertainty in long-term forecasts.