The US Economy, measured by its Gross Domestic Product (GDP), represents the total value of all goods and services produced within a year. However, looming over this economic output is the ever-growing shadow of National Debt, raising concerns about sustainability and future generations. This article delves into the comparison between these two figures, explores how recent events impacted them, and examines the challenges posed by a large National Debt exceeding the size of the US Economy.
The National Debt of the United States has been steadily climbing, driven by several factors including fiscal policy, increased spending, and economic downturns. The COVID pandemic significantly accelerated this trend, adding over $7 trillion to the debt, while the roots run deeper. The Great Recession of 2008 also played a major role, pushing the debt-to-GDP ratio above 60% for the first time since World War II. As of Valentines Day 2024, the US National Debt stands at a staggering $34.3 trillion, that’s 34 x 10(12), exceeding 125% of the country’s GDP1.
Inflationary Dance with Debt
This high debt burden intersects with another economic concern: inflation. Increased spending and money supply expansion are often cited as contributing factors to inflation. In 2023, the US experienced inflation rates not seen in decades, exceeding 9% at one point2. While complex and multifaceted, the correlation between debt, money supply, and inflation cannot be ignored3. As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Growth in money supply does not automatically mean inflation, but if it outpaces productivity, inflation often follows.
“Only when the tide goes out do you discover who’s been swimming naked.” 4
Warren Buffet
Sustainability Concerns and Interest Bite
Beyond inflation, a ballooning debt raises concerns about its long-term impact. Servicing the debt consumes an increasingly larger portion of the federal budget, diverting resources from crucial areas. The interest on our debt in 2023 reached $659 billion dollars4, to put that in perspective there are less than 40 countries in the World whose entire economy is greater than the interest alone we are paying on our debt5. As interest rates rise, often seen during periods when the Federal Reserve is combatting inflation, interest payments balloon exacerbating the challenge of pay down the debt. Additionally, a high debt can weaken investor confidence, potentially leading to higher borrowing costs and hampering economic growth6.7
“I have yet to see a time when it made sense to bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
Warren Buffett
Balancing Act and Looking Ahead
Managing the national debt requires a delicate balancing act. Reducing spending can be politically unpopular, and raising taxes carries economic risks. Meanwhile, relying solely on economic growth for debt reduction is an uncertain strategy. Finding a sustainable path forward necessitates responsible fiscal policy (spending within our means) and bipartisan cooperation, both of which remain elusive in the current political climate.
However, as Warren Buffett has bullishly stated: “I have yet to see a time when it made sense to bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
While expressing confidence in the long-term potential of the US economy, acknowledging the need for responsible debt management remains crucial.
Citations:
- US Treasury – Debt to Penny
https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny ↩︎ - Bureau of Labor and Statistics (BLS)
https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm ↩︎ - The Great Inflation | Federal Reserve History
https://www.federalreservehistory.org/essays/great-inflation ↩︎ - Investopedia – Warren Buffet
https://www.investopedia.com/berkshire-hathaway-loss-buffett-shareholder-letter-7151633 ↩︎ - Washington Post – Interest Debt Payment
https://www.washingtonpost.com/business/2023/10/20/interest-debt-payment-treasury/ ↩︎ - World Bank – Data (GDP Ranking):
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD ↩︎ - National Bureau of Economic Research (NBER)
https://www.nber.org/system/files/chapters/c6669/c6669.pdf ↩︎ - International Monetary Fund (IMF)
https://www.imf.org/en/About/Factsheets/Sheets/2023/imf-world-bank-debt-sustainability-framework-for-low-income-countries ↩︎
