Ways Out of Debt: US Options for National Debt

Jun 14, 2025

The United States finds itself at a critical juncture, facing a national debt of unprecedented scale in peacetime. As of early 2025, the total national debt exceeds $36.2 trillion, with the debt-to-GDP ratio hovering around 124%, a level last consistently seen only in the immediate aftermath of World War II [1, 2]. This towering figure casts a long shadow over the nation’s economic future, raising urgent questions about its sustainability and the path forward. While the U.S. has a history of managing significant debt burdens, the current challenge is distinct in its magnitude and the underlying structural imbalances driving it. As in the old adage “When you’re in a hole, first step is to stop digging” – there is gaining recognition of the scope and scale of the challenge. Understanding the perils of this high debt and the various strategies available for its reduction is crucial for navigating America’s fiscal future.

The Current Debt Landscape and its Dangers

The current debt level is not merely a number; it represents a fundamental imbalance between federal spending and revenue. Projections indicate that, without significant policy changes, federal debt held by the public could rise to 156% of GDP by 2055 and 206% by 2075 [3]. This trajectory is driven primarily by increasing outlays on major entitlement programs like Social Security and Medicare, coupled with surging net interest costs and a revenue stream that isn’t keeping pace with expenditures [3].

The dangers associated with such high and rising national debt are multifaceted and can have profound impacts on the economy and the lives of ordinary Americans:

Slow Economic Growth: High government borrowing can “crowd out” private investment. When the government demands a large share of available capital, it can drive up interest rates, making it more expensive for businesses to borrow and invest in job creation, innovation, and expansion. This ultimately dampens long-term economic growth and reduces wages [3, 4]. Studies have indicated a statistically significant negative relationship between high federal debt and economic growth [4].
Inflation and Devaluation of the Dollar: While not a direct cause-and-effect relationship, persistently large deficits financed by money creation can increase the money supply without a corresponding increase in goods and services, leading to inflationary pressures. Inflation erodes purchasing power, diminishing the value of savings and making everyday goods and services more expensive for households [4, 5]. In extreme scenarios, a loss of confidence in the dollar due to fiscal instability could lead to its devaluation, further exacerbating inflation and reducing America’s global standing [4].
Higher Interest Rates: A growing national debt means the government must borrow more, increasing demand for loanable funds. This puts upward pressure on interest rates, not just for the government but also for consumers and businesses. Higher interest rates translate to more expensive mortgages, car loans, and business credit, further dampening economic activity [3, 4].
Higher Debt Service Crowding Out Other Spending: As the debt grows and interest rates rise, a larger portion of the federal budget must be allocated simply to pay interest on the existing debt. In 2024, the U.S. spent $1.1 trillion on interest, nearly doubling from five years prior, surpassing spending on national defense [6]. This rapidly increasing debt service limits the government’s flexibility to invest in crucial areas like infrastructure, education, research and development, and national security, which are vital for future prosperity [3, 4].
Risk of a Fiscal Crisis: Perhaps the most severe, albeit less predictable, danger is the risk of a fiscal crisis. This occurs when investors lose confidence in the government’s ability or willingness to manage its debt, leading to an abrupt increase in interest rates, a collapse in bond prices, and widespread economic disruption. Such a crisis could jeopardize the dollar’s status as the world’s reserve currency, making it exceedingly difficult for the federal government to borrow and fulfill its essential functions [4].

Historical Paths Out of Debt: Lessons from the Past

Despite the daunting nature of the current debt, the United States has successfully reduced significant debt burdens at various points in its history. These periods offer valuable, albeit not perfectly transferable, lessons.

Period	Initial Debt-to-GDP (Approx.)	Final Debt-to-GDP (Approx.)	Key Strategies Employed
Post-Revolutionary War (late 1700s – early 1800s) [7]	Significant, but variable	Reduced substantially	Fiscal consolidation, establishment of federal credit, tariffs, land sales.
Post-War of 1812 (1815-1835) [7]	~16% (1815)	0% (1835)	Sustained budget surpluses, significant land sales, spending cuts, strong political will to eliminate debt.
Post-Civil War (1865-early 1900s) [7]	~31% (1865)	~3% (early 1900s)	Economic growth, deflation, consistent budget surpluses, relatively frugal government spending.
Post-World War II (1946-1974) [7, 8]	117.5% (1946)	~23% (1974)	Rapid economic growth, primary budget surpluses, “surprise” inflation, financial repression (low-interest rate policies by the Federal Reserve).
Late 1990s (1993-2001) [7]	~66% (1993)	~56% (2001)	Economic boom (dot-com era), fiscal discipline (tax increases, spending restraint), “peace dividend” (reduced defense spending), budget surpluses.

The most relevant historical parallel to today’s situation is the post-World War II era, where the debt-to-GDP ratio was even higher than it is currently. While significant economic growth played a role, it was complemented by other factors like sustained budget surpluses, unexpected inflation, and periods of financial repression [8].

Ways Out of Debt, US Options

Reducing the U.S. national debt to a manageable amount (Roughly 20%-50% of GDP) would require a combination of difficult and politically challenging measures. Here are eight potential strategies:

1. Increase Taxes

How it would work: This involves directly increasing government revenue. Various approaches could be employed:

Raising Income Tax Rates: Both individual and corporate income tax rates could be increased. For individuals, this could mean higher marginal rates across income brackets or specifically for high-income earners. For corporations, reversing some recent tax cuts would increase federal revenue.
Implementing a Value-Added Tax (VAT): A VAT is a consumption tax levied at each stage of production and distribution. Many developed countries use VATs, and a broad-based VAT in the U.S. could generate substantial revenue [9].
New Payroll Taxes: Expanding the base of earnings subject to Social Security taxes or increasing the payroll tax rate could bolster these critical programs and contribute to overall revenue.
Eliminating or Limiting Deductions: Reducing tax breaks, such as itemized deductions or certain tax preferences, broadens the tax base and increases effective tax rates for many taxpayers [9].
“Sin Taxes” or Carbon Taxes: Taxes on goods like tobacco, alcohol, or carbon emissions could provide revenue while potentially discouraging certain activities.

Challenges: Tax increases are often politically unpopular and can face strong opposition from various interest groups and taxpayers concerned about their impact on economic growth and personal income.

2. Lower Spending (Austerity)

How it would work: This involves reducing government expenditures across the board.

Mandatory Spending Reform: The largest portions of the U.S. budget are mandatory programs, primarily Social Security, Medicare, and Medicaid. Reforms could include adjusting eligibility ages, altering benefit formulas, or establishing caps on federal funding for these programs. Given the aging population, these reforms are often cited as critical for long-term fiscal sustainability [3, 9].
Discretionary Spending Cuts: This category includes defense spending, education, infrastructure, scientific research, and other government operations. Reductions could involve limiting new projects, cutting personnel, or reducing funding for specific agencies. For example, options include reducing the Department of Defense budget or cutting funding for international affairs programs [9].
Improving Efficiency and Reducing Waste: Efforts to streamline government operations, reduce improper payments, and combat fraud and abuse can contribute to savings, though often not on the scale required to significantly impact the overall debt.

Challenges: Spending cuts, especially to popular entitlement programs or critical services, are intensely debated and politically difficult due to their direct impact on citizens and various sectors of the economy.

3. Economic Growth

How it would work: Rather than directly cutting spending or raising taxes, this strategy focuses on growing the economy faster than the debt. As Gross Domestic Product (GDP) expands, the debt-to-GDP ratio naturally decreases, and a larger economic pie generates more tax revenue even with existing tax rates.

Investing in Productivity: Government investments in infrastructure (roads, bridges, broadband), education, and research and development (R&D) can boost long-term productivity and innovation.
Pro-Business Policies: Policies that foster a favorable environment for businesses, such as regulatory reform, reduced bureaucratic hurdles, and incentives for private investment, can spur economic activity.
Trade Liberalization: Expanding trade opportunities can lead to increased exports, economic growth, and job creation.

Challenges: While desirable, relying solely on economic growth is often insufficient, especially with very high debt levels. Sustained high growth rates are difficult to achieve and maintain, and the benefits can take time to materialize. The post-WWII debt reduction showed that growth alone wasn’t enough; it required accompanying fiscal surpluses and other factors [8].

4. Inflation (Devalue Dollar)

How it would work: This involves allowing or actively encouraging a higher rate of inflation. Inflation erodes the real value of existing debt, particularly fixed-rate debt, because the government repays creditors with dollars that are worth less in real terms. Many consider this an indirect tax as it is a willful means of devaluing dollar and reducing the buying power of citizens savings. However, this maybe more palatable to politicians as they don’t have to be blamed for raising taxes.

Monetary Policy: While central banks primarily target price stability, a more permissive stance towards inflation, or even policies that actively increase the money supply, could lead to higher inflation.
Fiscal Stimulus: Large, debt-financed fiscal stimulus without corresponding increases in productive capacity can also fuel inflation.

Challenges: This is a risky strategy. While it can reduce the real burden of debt, it comes at a significant cost:

Erosion of Purchasing Power: Inflation acts as a “stealth tax,” diminishing the value of citizens’ savings, wages, and fixed incomes. A high likelihood of creating economic strife.
Uncertainty and Instability: High and volatile inflation creates economic uncertainty, discouraging investment and long-term planning.
Loss of Confidence: Persistent high inflation can undermine confidence in the national currency, potentially leading to capital flight and a loss of the dollar’s global reserve status.
Higher Future Borrowing Costs: Lenders will demand higher interest rates to compensate for anticipated inflation, making future government borrowing more expensive. Attempts to inflate away debt are rarely a sustainable solution for a major economy [5].

5. Asset Sales

How it would work: The government could sell off federal assets to generate one-time revenue that could be used to pay down the national debt.

Real Estate: This could include selling underutilized federal buildings, land, or other real property. While the federal government owns a vast amount of property (e.g., millions of acres of land and thousands of buildings), the revenue generated from selling these assets, while significant, is often a small fraction of the total national debt [10].
Natural Resource Rights: Selling drilling rights for oil and gas, or mining rights on federal lands, could also generate revenue. Estimates suggest that recoverable energy resources on federal property could be valued in the trillions of dollars, potentially making a more substantial contribution [10].
Government-Owned Enterprises: While less common in the U.S. than in some other countries, the privatization of certain government-owned entities could also generate funds.

Challenges: Asset sales face considerable political opposition, often from those who believe public assets should remain publicly owned. Furthermore, a large-scale “fire sale” could depress market values, limiting the actual revenue generated. The revenue from such sales, while not negligible, would likely only make a dent in the current scale of the U.S. debt [10].

6. Modern Monetary Theory (MMT)

How it would work: MMT fundamentally redefines the role of government debt. Proponents argue that a sovereign government, as the issuer of its own currency, is not financially constrained in the same way a household or business is. It can “print” money to finance any spending it deems necessary, as long as there are available real resources (labor, materials) to employ.

Direct Money Creation: Instead of borrowing, the government would directly create new money to fund public spending, such as infrastructure projects, universal healthcare, or a job guarantee.
Inflation as the Only Constraint: Under MMT, the only true limit to government spending is inflation. If spending leads to an overheating economy and rising prices, then taxes would be used to reduce demand and cool the economy, rather than to fund spending itself.

Challenges: MMT is highly controversial among mainstream economists. Critics warn that:

High Inflation Risk: The theory’s premise of “unlimited” money creation, even with the caveat of inflation control, is seen as inherently risky and prone to leading to rampant, uncontrollable inflation. Historical examples of countries that resorted to large-scale money printing often experienced hyperinflation and economic collapse [5, 9, 13, 14, 15].
Loss of Dollar’s Status: Abandoning fiscal restraint and traditional debt management could severely undermine international confidence in the U.S. dollar, jeopardizing its critical role as the global reserve currency [9].
Political Discipline: MMT requires immense political discipline to raise taxes or cut spending at the precise moment inflation becomes a problem, which is challenging in a democratic system.

7. Default/Restructure

How it would work: These are extreme measures typically only considered by countries in severe financial distress.

Default: An outright refusal by the government to pay its debt obligations. This would involve simply not making interest or principal payments on outstanding bonds.
Restructuring: Negotiating new terms with creditors. This could involve extending repayment periods, reducing interest rates, or even accepting a haircut (a reduction in the principal amount owed).

Challenges: For a major economy like the U.S., which issues the world’s reserve currency and has a deeply integrated financial system, the consequences of default or even a forced restructuring would be catastrophic:

Loss of Creditworthiness: The U.S. would immediately lose its standing as a reliable borrower, making it extremely difficult and expensive to borrow in the future.
Financial Market Chaos: It would trigger a global financial crisis, as U.S. Treasury bonds are a cornerstone of the international financial system. Banks, pension funds, and investors worldwide hold vast amounts of U.S. debt, and a default would cause massive losses.
Economic Collapse: Domestic interest rates would skyrocket, the dollar would likely plummet, and the economy would plunge into a deep recession or depression.
Geopolitical Impact: The U.S.’s global influence would be severely diminished.

Given these dire consequences, default or forced restructuring is widely considered an unthinkable and non-viable option for the United States [11].

8. Nationalizing Resource Revenue

How it would work: This strategy involves the government taking greater control over valuable natural resources, directly collecting and utilizing the revenue generated from their extraction for public coffers, rather than primarily through taxes or royalties on private companies. A prominent example discussed in popular discourse, notably by Kevin O’Leary (“Mr. Wonderful”), suggests tapping into oil fields, such as those in Alaska, and nationalizing the revenue generated to pay down the national debt [16].

Direct Control and Revenue Collection: Instead of leasing drilling rights or collecting royalties from private companies, the government could directly own and operate extraction facilities, with all profits flowing to the Treasury.
Dedicated Debt Reduction Fund: Revenue generated from these nationalized resources could be specifically earmarked for debt reduction, similar to how some countries use sovereign wealth funds.

Challenges: This approach faces significant hurdles and criticisms:

Political Feasibility and Opposition: Nationalization of industries, particularly major ones like oil and gas, is a radical shift in U.S. economic policy and would face immense political and legal opposition. It would likely require significant compensation to existing private leaseholders and companies, potentially offsetting much of the initial revenue benefit.
Operational Expertise and Efficiency: Running complex industries like oil extraction effectively requires specialized expertise, capital investment, and efficient management, which critics argue governments often lack compared to private entities.
Market Dynamics and Volatility: Oil prices are highly volatile. Relying heavily on oil revenue for debt reduction would expose the national budget to significant swings based on global energy markets.
Environmental Concerns: Increased extraction, even under government control, could conflict with environmental goals and climate change mitigation efforts.
Limited Impact on Total Debt: While a large sum, the current annual revenue from federal oil and gas leases (around $8.5 billion in FY2023) is a tiny fraction of the over $36 trillion national debt [17, 18]. Even if all potential revenue were nationalized, it would take a very long time to make a substantial dent in the debt, especially considering the ongoing annual deficits.

Our Way Out

The path to significantly reducing the U.S. national debt is not simple, nor is there a single magic bullet. Another old adage, “It’s easy to get into something (debt), but it’s hard to get out.” History shows that debt reduction often involves a combination of strategies, with each period having its unique mix of choices and mechanisms. The post-World War II success was a rare alignment of rapid economic growth, sustained primary surpluses, and unexpected inflation. Today, the challenge is amplified by the sheer scale of the debt and the political difficulty of implementing the necessary fiscal adjustments.

Historically, the duration of significant debt reduction efforts has varied, but they are not short or easy. For instance, the dramatic decline in the debt-to-GDP ratio after World War II took nearly three decades (from 1946 to 1974) to reach its low point [8]. The period after the War of 1812, leading to the complete elimination of debt by 1835, spanned roughly 20 years [7]. These examples suggest that, even with concerted effort, significant and sustainable debt reduction is typically a multi-decade endeavor, requiring consistent policy choices across several administrations and legislative cycles on the order of a generation.

Achieving a substantial reduction, particularly to an ambitious 20-50% debt-to-GDP ratio, will almost certainly require a strong will and bipartisan commitment to a multifaceted approach. This would likely include:

Targeted spending cuts, especially to slow the growth of mandatory programs.
Strategic revenue enhancements, potentially including a broadening of the tax base.
Policies that consistently foster strong and sustainable economic growth.

These efforts are particularly critical in periods of a “shrinking credit cycle.” A shrinking credit cycle typically refers to a phase in the economic cycle characterized by:

Tightening Lending Standards: Banks and other lenders become more cautious, making it harder for businesses and consumers to access credit.
Reduced Availability of Capital: Less capital flows into the economy for investment.
Higher Borrowing Costs: Even for those who can get credit, interest rates tend to be higher.
Slower Economic Growth or Recession: As borrowing and investment decline, economic activity slows, leading to reduced corporate profits, job losses, and lower consumer spending [12].
Increased Defaults: Businesses and individuals struggle to repay existing debts, leading to higher default rates.

In such an environment, the challenges of debt reduction are exacerbated. Government tax revenues decline due to slower economic activity, while demand for social safety net programs (like unemployment benefits) often increases. This creates a painful squeeze on public finances, making it even harder to cut spending or rely on growth to improve the debt-to-GDP ratio. The current fiscal situation, with high debt and rising interest rates, means the U.S. is particularly vulnerable to the negative impacts of any future shrinking credit cycle, underscoring the urgency of proactive fiscal reforms.

Beyond economic considerations, debt discipline is a moral imperative for the well-being of future generations. Each dollar borrowed today represents a claim on future economic output and income, effectively shifting the burden of repayment to those who have yet to earn it. A nation that consistently lives beyond its means risks handing down a legacy of diminished economic opportunity, higher taxes, reduced public services, and greater financial instability to our children and grandchildren. Responsible fiscal stewardship ensures that future generations inherit a strong economy with the flexibility to address unforeseen challenges and invest in their own prosperity, rather than being perpetually constrained by the choices of the past. The journey out of the current debt levels will demand difficult choices and a sustained commitment to fiscal responsibility. The journey out of the current debt levels will demand difficult choices and a sustained commitment to fiscal responsibility.

References

[1] CEIC Data. (n.d.). US Government Debt: % of GDP, 1969 – 2025. Retrieved from https://www.ceicdata.com/en/indicator/united-states/government-debt–of-nominal-gdp

[2] U.S. Treasury Fiscal Data. (n.d.). Understanding the National Debt. Retrieved from https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/

[3] Peterson Foundation. (2025, May 1). New Report: Rising National Debt Will Cause Significant Damage to the U.S. Economy. Retrieved from https://www.pgpf.org/wp-content/uploads/2025/05/EY-Rising-National-Debt-Will-Cause-Significant-Economic-Damage.pdf

[4] U.S. House Committee on the Budget. (2025, March 5). The Consequences of Debt. Retrieved from https://budget.house.gov/press-release/the-consequences-of-debt

[5] The Budget Lab at Yale. (2025, March 12). The Inflationary Risks of Rising Federal Deficits and Debt. Retrieved from https://budgetlab.yale.edu/research/inflationary-risks-rising-federal-deficits-and-debt

[6] CBS News. (2025, June 11). The U.S. spends $1 trillion a year to service its debt. Here’s why experts say that’s a concern. Retrieved from https://www.cbsnews.com/news/trump-big-beautiful-bill-federal-debt-servicing-cost-what-to-know/

[7] Wikipedia. (n.d.). History of the United States public debt. Retrieved from https://en.wikipedia.org/wiki/History_of_the_United_States_public_debt

[8] CEPR. (2023, October 30). Reassessing the fall in US public debt after World War II. Retrieved from https://cepr.org/voxeu/columns/reassessing-fall-us-public-debt-after-world-war-ii

[9] Peterson Foundation. (n.d.). 76 Options for Reducing the Deficit. Retrieved from https://www.pgpf.org/article/76-options-for-reducing-the-deficit/

[10] Independent Institute. (2017, March 6). Liquidating Federal Assets: Executive Summary. Retrieved from https://www.independent.org/article/2017/03/06/liquidating-federal-assets/

[11] Investopedia. (n.d.). Sovereign Default: Definition, Causes, Consequences, and Example. Retrieved from https://www.investopedia.com/terms/s/sovereign-default.asp

[12] Loomis Sayles. (n.d.). Unlocking the Credit Cycle. Retrieved from https://info.loomissayles.com/unlocking-the-credit-cycle

[13] Investopedia. (n.d.). Hyperinflation Throughout History: Examples and Impact. Retrieved from https://www.investopedia.com/ask/answers/061515/what-are-some-historic-examples-hyperinflation.asp

[14] Investopedia. (n.d.). Worst Cases of Hyperinflation in History. Retrieved from https://www.investopedia.com/articles/personal-finance/122915/worst-hyperinflations-history.asp

[15] EBSCO Research Starters. (n.d.). Hyperinflation. Retrieved from https://www.ebsco.com/research-starters/social-sciences-and-humanities/hyperinflation

[16] Fox Business. (2023, April 11). ‘Shark Tank’ star Kevin O’Leary plans to build new US oil refinery to ‘do the right thing for America’. Retrieved from https://www.foxbusiness.com/media/shark-tank-kevin-oleary-build-new-us-oil-refinery-america

[17] Congressional Research Service. (2025, April 23). Revenues and Disbursements from Oil and Natural Gas Leases on Onshore Federal Lands. Retrieved from https://www.congress.gov/crs-product/R46537

[18] Energy in Depth. (2025, May 1). CRS: Federal Oil & Natural Gas Leasing Revenue Tops Nearly $8.5 Billion in 2023. Retrieved from https://www.energyindepth.org/crs-federal-oil-natural-gas-leasing-revenue-tops-nearly-8-5-billion-in-2023/

Ways Out of Debt: US Options for National Debt

Dec 1, 2024

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Would the United States qualify for a Mortgage?

Jun 12, 2024

If subjected to the guidelines that individual borrowers must follow, how would the US do?

While this question is pure folly, and clearly just a hypothetical question with no real world application. However, at the Tax Project we thought it would be a good thought exercise in something that most Americans are familiar with to understand their own credit worthiness, and often take a sobering look at their own finances and in doing so assess the state of our country in something more tangible and relatable.

We also realize that there are very sizable and distinct differences that don’t make the comparison likely, but there were enough similarities that we thought it would be instructive to review. First, let’s get the caveats out of the way that illustrate the folly of a real comparison. While the US has many other advantages, these are big ones:

Power of Taxation¹ – The US has the unlimited ability to Tax, through any source, to raise funds.
Reserve Currency – As the World’s reserve currency (See Article: Reserve Currency) the US is in a unique position to print money to raise funds in their own fiat currency. While this may devalue the dollar, the ability to print more is undiminished.
Assets – The US has tremendous assets. The Federal government owns more than a quarter of US land, over 600 million acres³. They have a sizable Real Estate Portfolio, Cash Reserves⁴, Strategic Oil reserves up to 700 million barrels⁵, substantial Mineral, Oil and Gas rights some of the largest in the world⁶, and a huge number of physical assets including an estimated $11 billion in Gold reserves alone and these are just to name a few. In short, the US has considerable assets as collateral.

All the caveats aside though, the US debt to income ratio, the long term debt, credit worthiness, and other metrics are all fair game to look at to ponder this question and understand and get a sense of how our country is doing financially. So, to put this question to the test, we asked an experienced Mortgage Broker to process the US Mortgage application, and here was her response:

Would the United States qualify for a Mortgage? 1

Susan Weber Pomilia

Susan has had over 30 years experience in the Mortgage Broker lending business, and has held leadership positions at several leading Finance companies and is currently a Regional Manager at Supreme Lending. Susan is a Director at Hennessy Advisors a Financial Services firm managing $4 billion in Assets Under Management. Susan is an Advisor for the Tax Project Institute.

To find out, let’s break down the typical guidelines for an individual qualifying for a mortgage and then consider how they might apply when comparing them to the country as a whole. There are several tests, as follows, to determine an applicant’s credit worthiness, and each MUST pass to qualify.

Lending Criteria

Credit score: Individuals can obtain a mortgage with a minimum credit score of 580, but to obtain the lowest interest rate available, most Investors require a score of 760. Similarly, a country might be evaluated based on its credit rating, which reflects its ability to repay debts. As of November of 2023, Moody’s is the only rating agency that maintains the US’ Federal Government Bond ratings at AAA credit rating (Highest rating, low risk) but downgraded their outlook for the future to “Negative”⁸. This means they believe the country’s rating will soon drop. Both Fitch and Standard & Poor’s rate the US at AA+^9,10. Even based on a reduced rating of AA+, the US would meet the credit score guideline, but may not secure the best terms or the lowest interest rate.

RESULT: PASS (albeit at a higher rate and cost)

Income and Debt-to-Income Ratios: Mortgage lenders calculate an individual’s gross monthly income and their monthly debts to determine their Debt-to-Income (DTI) ratios. Dividing the total debts by the gross income determines the DTI percentage. Lenders typically require a DTI of 49% or below. For a country, this could translate to evaluating its Gross Domestic Product (GDP), a measure of a country’s total economic output, and its Debt-to-GDP ratio. According to the US Bureau of Economic Analysis (BEA) the US GDP for Q1 2024 was $28.26 Trillion¹¹. As of 6/10/24 the US National Debt according to the US Treasury has soared to $34.7 Trillion¹². Based on this the DTI for the US would be: 122%. The US would need to be at a ratio of 49% or below to qualify, so based on the 122% ratio, the US would not meet the DTI guideline and would therefore not qualify for a home loan.

RESULT: FAIL

Employment Stability: Lenders look at an individual’s employment history and stability. They typically require 12 months of employment in the same job and two years in the same field. Similarly, a country’s employment rate and stability of its job market could be factors in determining its mortgage eligibility. The US’ current employment rate or labor force participation rate is 62.50%¹³, which is lower than the long-term average of 62.84%. The unemployment rate currently sits at 4.00%¹⁴. There are 6.6 Million people unemployed¹⁵ today (people that are looking for work but can’t find jobs). Yet surprisingly, the US job market has remained resilient with 272,000 new jobs added in May¹⁵. Based on the current data, the US would meet the employment stability requirement.

RESULT: PASS

Down Payment: Individuals typically have a down payment of 5% to 20% of the sale price when purchasing a home. For a country, this could be compared to its ability to make an initial payment or provide collateral. Countries with substantial reserves would have an easier time securing a mortgage. The US has $241 Billion¹⁶ in reserves alone, without the collateral mentioned above. Based on this number, the US would meet the reserve guideline.

RESULT: PASS

Property Appraisal: Lenders will have the property being purchased (collateral for the mortgage) appraised to ensure its value supports the requested loan amount. Lenders will then compare their Loan amount to the appraised Value known as a Loan-to-Value (LTV) ratio. Lenders will lend between 80% to 97% of the sales price in most cases but will offer more favorable interest rates with a lower LTV. In the case of the US, we should look at the total value of improved real estate, which is $47 Trillion¹⁷, while the amount of mortgage debt the country carries is $20.2 Trillion¹⁸. The LTV for the US is 42.9%, which is low. For this reason, the US would qualify under the appraisal guidelines.

RESULT: PASS

Interest Rates: Individual mortgage rates are influenced by market conditions, credit cycles globally and the US central bank, the Federal Reserve, and the borrower’s risk profile as detailed above. A country’s mortgage rate would be influenced by global economic factors and its perceived risk as a borrower. If the US did qualify for a loan, their rate would likely be below that of the best customers with higher credit ratings based on the credit ratings agencies outlook for the US and collateral and material advantages as a Sovereign nation. However, the very high Debt to Income ratio could be cause for concern amongst lenders potentially increasing rates.

Conclusion

As we’ve seen, qualifying for a mortgage isn’t easy, even for a nation as powerful as the United States. While the US would NOT pass a traditional mortgage test due to its high debt-to-income ratio, its unique position allows it to borrow money in ways individuals can’t. However, this exercise highlights the importance of fiscal responsibility for any entity, even a government.

Unlike an individual mortgage default, a sovereign debt crisis can have far-reaching consequences, impacting global markets, economic stability, and disrupting the lives of its citizens. While the US isn’t facing imminent danger, the long-term outlook requires addressing our debt and investing in our future.

We hope this thought exercise sparked your interest in US fiscal health. Here are some resources for further exploration:

The Tax Project: https://taxproject.org
Congressional Budget Office (CBO): https://www.cbo.gov/
National Debt Clock: https://www.usdebtclock.org

By staying informed and engaged, we can work towards a more prosperous future for America.

Citations:

US Constitution, Article I, Section 8 https://en.wikipedia.org/wihttps://www.bea.gov/data/gdp/gross-domestic-productki/Taxing_and_Spending_Clause
Reserve Currency
https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reserve-currency.asp
US Federal Land
https://en.wikipedia.org/wiki/Federal_lands
US Treasury Reserve Assets – May 2024
https://home.treasury.gov/data/us-international-reserve-position/05102024
Strategic Petroleum Reserve
https://www.spr.doe.gov/
US Oil Reserves
https://oilprice.com/Energy/Energy-General/US-Has-Worlds-Largest-Oil-Reserves.html
US Treasury Gold Reserves
https://www.fiscal.treasury.gov/reports-statements/gold-report/21-02.html
Moody’s US credit downgrade
https://www.reuters.com/markets/us/moodys-changes-outlook-united-states-ratings-negative-2023-11-10/
Fitch US credit downgrade
https://www.reuters.com/markets/us/fitch-cuts-us-governments-aaa-credit-rating-by-one-notch-2023-08-01/
Standard & Poor’s US credit downgrade
https://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html
US GDP Bureau of Economic Analysis
https://www.bea.gov/data/gdp/gross-domestic-product
US Treasury Debt to the Penny
https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny
Bureau of Labor and Statistics (BLS) Labor Participation
https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htm
Bureau of Labor and Statistics (BLS) Unemployment Rate
https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
Bureau of Labor and Statistics (BLS) News Release June 2024
https://www.bls.gov/news.release/pdf/empsit.pdf
US Federal Reserve May 2024
https://home.treasury.gov/data/us-international-reserve-position/05102024
US Improved Real Estate Value Redfin
https://www.redfin.com/news/housing-market-value-hits-record-high-2023/
US Federal Reserve FRED Mortgage Debt
https://fred.stlouisfed.org/release/tables?eid=1192326&rid=52
US Infrastructure Aging Cost
https://phys.org/news/2022-09-america-aging-infrastructure-sags-pressure.html
IMF US Growth Estimates 2024
https://www.cnn.com/2024/04/16/economy/imf-us-economy-growth-inflation-warning/index.html
OECD Economic Outlook 2025
https://www.oecd.org/newsroom/economic-outlook-steady-global-growth-expected-for-2024-and-2025.htm#:~:text=GDP%20 growth%20in%20the%20United,costs%20and%20 moderating%20 domestic%20 demand.
Federal Reserve Board Economic Tightening
https://www.frbsf.org/research-and-insights/publications/economic-letter/2024/05/economic-effects-of-tighter-lending-by-banks/

Would the United States qualify for a Mortgage?

Feb 23, 2024

The US Economy as measured by our Gross Domestic Product (GDP) is the largest in the World. This encompasses all the productive output of all citizens, government, and corporations.

In the last few years we have seen a tremendous growth in the National Debt, or the sum accumulation of annual budget deficits for the Federal Government. The COVID Pandemic and the Great Recession of 2008 accelerated this trend.

Now, the National Debt is greater than the entire US Economy.

Debt to the Penny

Understanding the National Debt: Uncle Sam’s Borrowing Habit

Feb 17, 2024

Imagine running your household. You earn money (income), spend on essentials (expenses), and sometimes need to borrow for bigger purchases (debt) that exceed your income or savings. The national debt is similar, but on a much larger scale, affecting the entire country. While it is not the same as the US has some other unique features that allow it to potentially borrow more, it acts in the same way.

What is it?

The National Debt is simply the total amount of money the US government owes. It accumulates whenever the government spends more than it collects in taxes and other revenue. It is like using a credit card – convenient in the short term, but the bill comes due eventually and like a credit card the Government must pay interest on the debt in the form of Interest payments, often referred to as Debt service.

Who manages it?

Several key players manage the National Debt:

The Treasury Department¹: They issue debt instruments like Treasury bills, notes, and bonds, borrowing money from investors to raise money “credit” for the Government.
The Federal Reserve: They play a role in managing interest rates, which affect the cost of borrowing for the government. They set a key borrowing rate known as the Fed Funds rate at which other banks’ rates are set against. As interest rates rise, so does the expense of service the debt, much like credit card companies raising the interest rates for your credit.
Congress: They authorize the government to spend and borrow money, responsible for managing the debt. Congress holds the purse strings on spending by authorizing spending bills and setting the Debt limit with authorized Debt ceilings.

Who does what?

Several independent agencies track the National Debt:

Government Accountability Office (GAO): They audit the government’s financial statements and report on the debt.
Congressional Budget Office (CBO): They provide economic forecasts and analyze the impact of debt on the budget.
Bureau of the Fiscal Service: They manage the day-to-day operations of the national debt.
Executive (President of the United States): The President sets the Fiscal Policy, Priorities, and Plan for the budget.
Office of Management and Budget (OMB): They help prepare the President’s budget, manage the Execution once Congress has approved the budget, and manage the oversight and performance management of the budget.

How does it grow or shrink?

Debt grows when the government spends more than it takes in. This can happen through various scenarios:

Fiscal Policy: When the President’s Fiscal Policy spends (intentionally or unintentionally) more than the taxes and revenue collected.
Tax cuts: When taxes are lowered and not offset by the Economic growth from the tax cuts.
Increased spending: More money on programs like entitlements including Social Security and Medicare or discretionary items like national defense, infrastructure programs add to the debt.
Economic downturns: When the economy shrinks, tax revenue falls, and the government chooses to borrow to stimulate it instead of reducing spending.
Exogenous events: Events like the 2008 Financial Crisis, Wars, or the COVID Pandemic can lead to debt spending to address.

The debt shrinks when the government collects more revenue than it spends or through strategic debt payments. Many of these are possible but often not used as they can be politically risky.

Government Spending Cuts: The Government can reduce spending by cutting or reducing programs.
Increased Taxes: The Government can increase taxes, although the long-term effects are mixed potentially reducing long-term growth which also impacts taxes collected.
Economic Growth: While not shrinking the debt, as the Economy grows more taxes are collected. If expenses remain the same, growth will reduce the ratio of expenses to revenue, effectively shrinking the budget.

Where does it fit in with spending and policy?

Fiscal policy is set by the President and refers to how the government manages its spending and taxes. It is a balancing act: providing essential services while keeping the debt under control. Like household credit it must be balanced with the benefits of immediate spending versus the challenges of paying items back later knowing that for every dollar you put on credit you will be reducing your available money to spend because a portion of your income will now go to credit card fees.

“If you choose not to decide, you still have made a choice”
Freewill performed by Rush

Historical context

The National Debt started during the Revolutionary War to finance the fight for US Independence. Since then, it has fluctuated based on several factors like wars, economic recessions, and government priorities.

How is it authorized?

Congress authorizes the government to borrow money by passing legislation, setting limits on the amount of debt allowed, known as the Debt Ceiling. From time to time this limit must be authorized to expand the Debt Ceiling to enable more debt to pay government bills.

The Future?

The National Debt is a complex issue with no easy solutions. Balancing competing priorities, managing interest payments, and ensuring long-term economic stability are key challenges. While there is no magic bullet, responsible fiscal policy, public understanding, and informed debate are crucial for navigating the complexities of the National Debt. The debt burden and interest on the National Debt are very real and left unmanaged can lead to negative consequences to the Economy and our Country.

Understanding the National Debt: Uncle Sam’s Borrowing Habit

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The Current Debt Landscape and its Dangers