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National Debt

Who’s afraid of our $34 trillion national debt?

Stacey Vanek Smith Jan 30, 2024
Heard on:
The U.S. national debt is about 120% of what the economy generates in a year. But is this cause for concern? Win McNamee/Getty Images
National Debt

Who’s afraid of our $34 trillion national debt?

Stacey Vanek Smith Jan 30, 2024
Heard on:
The U.S. national debt is about 120% of what the economy generates in a year. But is this cause for concern? Win McNamee/Getty Images

The U.S. is in a record amount of debt. (That’s the national debt, the total amount the federal government owes its creditors.)

And now the $34 trillion question: Should we change our hard-charging ways, or should we stop worrying and learn to love the debt?

How high should the government’s debt be? Is it bad to be in a lot of debt? Should we make painful cuts to bring the debt down? These are questions coming up a lot lately, as the government comes up against another budget deadline in early March. Yet again, Congress will have to come to a budget agreement or risk a government shutdown.

How much do we owe, anyway?

The U.S. national debt totals about $34 trillion.

“That is a really hard number to really understand, right?” said Rachel Snyderman, the director of economic policy at the Bipartisan  Policy Center in Washington, D.C.

Debt can be a great thing, she said, helping to fund important programs and deal with crises. Still, she said, when the numbers get this big, they’re almost impossible to really understand. (Does it help if I tell you that if you had 34 trillion footlong Subway sandwiches and stacked them end to end, you could get to Neptune and back? Probably not so helpful, but maybe NASA needs to know about this, and also it’s been too long since I’ve had a meatball sub).

Maybe it’s more useful to put that number into an economic context: $34 trillion is bigger than the Chinese economy. Add to that the economies of Japan, Germany, India and the United Kingdom, and combined they generate about $34 trillion a year. 

Debt-to-GDP Ratio

The $34 trillion is also bigger than our own economy. The United States’ gross domestic product, or GDP, which is the sum total of all the goods and services we produce in a year, is about is about $27 trillion. “ What this really shows is that the United States likes spending money more than it likes bringing in revenues,” Snyderman said. 

Our debt is around 120% of what our economy generates in a year; that’s our debt-to-GDP ratio. 

Is a lot of national debt bad?

So, if my friend Ralph was spending 120% of what he earned, I would strongly recommend he go on a strict spending regimen and probably stop eating Subway sandwiches entirely.

But countries are different — they can print their own money. So if you’re a country, is a lot of debt really bad? Not so bad? The truth is, we just don’t know. In fact, this very question sparked a major debate among economists in the last few years. 

That’s the funny thing about the national debt: Although the numbers are knowable, very often the consequences are not. 

Of course, some consequences we do know, like the amount of interest we pay on that debt: about $2 billion a day, and by 2050, the Congressional Budget Office projects the interest payments on our debt will be the country’s single biggest expense.

“Is that where Americans want their hard earned tax dollars going?” asked Snyderman. “Probably not.”

Another potential consequence of the debt? Trust issues. And that’s not as benign as it might sound.

When debt gets this high, it can alarm investors, said Raghuram Rajan, a professor of finance at the University of Chicago’s Booth School of Business, who also served as chief economist at the International Monetary Fund. “Eventually, you rack up huge debts and nobody trusts you anymore,” he explained.

Let’s do the numbers

In the world of debt, if someone doesn’t trust you, they charge you a lot of interest when they lend you money.  If you’re a country, loans come in the form of government bonds. 

So when Kai Ryssdal does the numbers and says: “Bond prices fell, the yield on the 10-year T-note rose to…” Kai is talking about debt. Ten-year Treasury notes are government bonds, little loans the government sells. But the amounts it sells are not so little. The government sometimes sells hundreds of billions of dollars’ worth of government bonds in a week. Bonds are the government’s main source of revenue along with taxes. 

Make no mistake: the 10-year T-note is keeping the lights on. 

The trouble with trust issues

So the government loves its bonds and investors love them too. U.S. government bonds are one of the most popular investments on the planet. The reason? Safety. 

U.S. government bonds are perceived to be extremely safe. Sometimes they are even referred to as a riskless asset.

And that safety might get called into question if U.S. debt gets much higher, said economist Rajan. People might start to think: ‘Wow, the U.S. owes a lot of money. Are they going to be able to pay all of this back? If I lend them money, will they be able to pay me back?’” 

If that happens on a large scale, that yield on the 10 year T-note Kai is always talking about will start going up and up

That’s investors demanding higher interest rates for buying U.S. bonds and lending the government money. And that could be the moment when our $2 billion a day in interest payments quickly balloons, Rajan said.

And that will happen soon?

The truth is, we don’t know. That’s the other tricky thing about national debt: We don’t know the limits and whenever we think we do, we seem to be wrong, says economist Rajan. “Is there a level of debt-to-GDP that we should worry about? Yes. What is that level? We don’t know.” 

What we do know is that so far, investors haven’t really blinked, even though conventional wisdom used to hold that a country’s debt should not get higher than 90% of its GDP

“But Japan blew way past that [its debt-to-GDP ratio is more than 250%] and nothing happened, and then Italy has blown way past that [its debt-to-GDP ratio is 140%) and nothing has happened,” Rajan said. “We are in totally uncharted territory.” 

Given all of that, is a measly 120% debt-to-GDP ratio really such a big deal?

The first rule of debt crises

“Beware, because the nature of debt crises is that no one can see them coming,” said John Cochrane, an economist at Stanford University’s Hoover Institution. He said debt is an important tool for a country, and its importance is why we should be so concerned.

Cochrane points out that during the Great Recession and  the COVID-19 shutdown,  the United States was able to swoop in fast with billions for  bailouts, stimulus checks and aid programs.

“Government debt is a wonderful invention,” he said. “Governments should borrow and spend carefully during wars, recessions, crises.”  

But if the debt gets too big, Cochrane cautioned, the government might not be able to respond so decisively next time. The money might be slower to come, and the government might not be able to raise as much.

“If we go into another hard time, does the government have the capacity to persuade people: ‘Another $8 trillion, we’re good for it’?”

That’s when the all-important trust issues could kick in.

One possible place to start in the $34 trillion question? Congress could agree on a spending plan for this fiscal year, so the government can keep operating past March. 

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