Is the $27 Trillion National Debt a Problem? Why Some Economists Aren't WorriedSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on December 4th, 2020
By Patrick Doherty, CFP®, December 4, 2020
The growing national debt has concerned Americans for as long as I can remember. U.S. government debt first reached $1 trillion in 1981—and now exceeds $27 trillion.
Investors fear that mounting debt will eventually devalue the currency and lead to high interest rates. Politicians warn of compromised national security. Personally, I’ve worried that we’re kicking the can down the road, and my kids will pay the price with much higher tax rates.
So, it really caught my attention when a respected industry leader convincingly justified all that deficit spending with a compelling set of facts. According to Global Market Strategist Brian Levitt, low interest rates, economic growth, and the federal government’s low debt-to-assets ratio make the debt relatively affordable.
After researching the topic further, I wanted to expand on his position and provide a few relevant rebuttals to his general argument. First, here’s a video clip of Levitt and Bob Reby discussing the topic:
The Proverbial Fiscal Cliff – Are We There Yet?
The national debt now exceeds our annual Gross Domestic Product (GDP), the value of all goods and services produced in a year. Deficit hawks often point to the high debt-to-GDP ratio as an omen that we’re approaching a fiscal cliff. That once we start falling, there’s no safe landing.
The proverbial cliff is the point at which the national debt gets so high that it scares investors away from financing our deficit spending through the purchase of U.S. treasuries. This would force some combination of tax hikes, austerity measures, or intentional currency devaluation that potentially cripples economic growth.
Fortunately, we’re not approaching a cliff blindfolded. The market still perceives U.S. government debt to be a very safe investment. As Levitt points out, demand for U.S. treasuries remains extremely high despite record-high deficits and interest rates below the rate of inflation.
What Are the Deficit Hawks Missing?
Why are investors so confident that our government will be able to repay the debt? Rather than comparing total debt to annual GDP, Levitt suggests using different benchmarks.
Here are a few alternative considerations:
1. Debt-to-Asset Ratio
According to Levitt, the federal government owns more than $200 trillion in land, commodities, financial assets, and other property—far beyond the $27 trillion debt. 1 In 2017, President Trump even suggested selling some of these assets to cut the debt. 2
2. Interest Rates Versus GDP Growth
Fast forward a few decades, and our present-day debt will probably seem a lot less daunting. Economists project a $131 trillion annual GDP by 2066. At that point, tax revenue will be $22 trillion. 1 Levitt believes that so long as the economy grows at a rate that exceeds our cost of borrowing, government tax revenue will keep pace with debt obligations.
3. Who Do We Owe?
Not all debt is an equal liability. U.S. taxpayers currently own the largest share of the national debt, through the Social Security Trust Fund and other agencies. Foreign governments hold approximately only 25% of the debt. China owns $1.07 trillion—not insignificant, but also far less than many people assume when worried about the political risks of owing too much money to a rival government. 3
Not Everyone Agrees with Levitt – Here’s Why
Earlier this year, Cato Institute Senior Fellow Randal O’Toole disputed the valuation on government assets, concluding “The $200 trillion value is at least 50 times too much.” 4, 5
O’Toole makes three key points:
1. Selling the massive volume of commodities or land required to make any material impact on the national debt would undoubtedly cause market prices to crater.
2. The valuation on energy resources does not factor in the significant “costs of extracting and transporting the resources to markets.”
3. Certain assets – such as the U.S. military, national parks, and wildlife refuges – will never be sold, no matter the circumstances, and should not be considered in the analysis.
Regardless of whether our assets can be used to pay off the debt, nearly all economists agree that annual spending deficits produce at least some negative consequences.
For example, government spending can “crowd out” more productive private investment. Additionally, “owing money to ourselves” doesn’t mean the debt gets forgiven; future generations will pay for our deficits plus any compound interest.
Levitt encourages investors to worry less about the national debt but stops short of dismissing the risk altogether. Even he concedes that if the economic growth required to offset the cost of borrowing does not materialize, politicians will have to make some painful decisions: Raise taxes, slash retirement benefits, or even devalue the currency.
We cannot know for sure what the future holds. However, we can prepare for it by addressing the risks to our financial security. Please do not hesitate to call us if you need a financial plan designed to achieve your goals in an uncertain future.
1. OppenheimerFunds. The Truth About Debt. September 8, 2017. https://www.rebyadvisors.com/sites/default/files/users/rebyadvisors2/pdf/The_Truth_About_Debt-Brian-Levitt.pdf
2. MarketWatch. Trump’s intriguing idea: Cut debt by selling off federal assets. March 29, 2017. https://www.marketwatch.com/story/trumps-intriguing-idea-cut-debt-by-selling-off-federal-assets-2017-03-28
3. the balance. Who Owns the US National Debt? October 14, 2020. https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124
4. Cato Institute. Can Federal Assets Cover the National Debt? June, 29, 2020. https://www.cato.org/blog/can-federal-assets-cover-national-debt
5. Randal O’Toole. The Antiplanner: Dedicated to the sunset of government planning. June 30, 2020. https://ti.org/pdfs/APB59.pdf