Most of us haven’t witnessed any cataclysmic economic collapses in our lifetime, at least not the kind that could jeopardize the future of a nation. So, when we hear economic or political pundits and relatives harping on our nation’s debt levels, it can sometimes be easy to just dismiss the debate entirely.
Sometimes though, the average person can’t help but wonder, does this even matter to me?
Like any good business would, the US government runs on and makes extensive use of debt.
- The last time the country was debt-free was almost two centuries ago in 1835 when Andrew Jackson decided to pay it all off by curtailing spending and selling government property.
- Since 1970, we’ve run our government on a deficit every fiscal year except for 4. That’s 46/50 years, meaning 92% of the time we’re over budget.
- No, China doesn’t own the United States or its debts. The $28 trillion dollar debt pie is owned by approximately 22% intragovernmental holdings, meaning money the government owes itself, and 78% is held by the public.
- Of the over $20 trillion USD in publicly held debt, foreign countries hold only about $6.5 trillion of it. Japan and China each own about $1.1 trillion, followed by the UK and a few other countries.
But is this sustainable?
When it comes to government debt, it’s fair to think of it similarly to your mortgage. Just as a lender would look at your debt-to-income ratio as a measure of home affordability, the government debt sustainability is viewed through the lens of its debt-to-GDP ratio. If the economy is producing enough income to continue maintaining its repayment schedules on the debt, it’s considered sustainable, but to what degree is highly controversial.
It’s considered prudent by many economists to maintain a level below 60% to see that the nation’s debt doesn’t eat up the entirety of its GDP, while another study by the World Bank showed that sustained ratios above 77% can lead to economic slowdowns. While there’s no fixed standard as to what’s too high, you can paint an approximate range here.
But the US hasn’t seen a debt-to-GDP ratio in the 60-70% range since before the 2008 financial crisis. It went from 68% to 100% in 5 years, and it hasn't looked back since. And it maintained slightly above a 100% ratio up until the pandemic last year, which brought the ratio all the way up to 129%.
So... is this bad?
The higher this debt-to-GDP ratio climbs, the higher the supposed risk of defaulting on the debt owed, which would obviously be no small deal if the United States were to do so. It would also have a considerable effect in numerous forms we won't go into here. Although we’re nowhere near Venezuela's 350% ratio just, some are understandably concerned.
And the reality is that whether this is going to come back to hurt us or not, how it could impact us is TBD. For now, our most reliable route is to be aware and take care of your own personal finances first and foremost.