A SPECIAL REPORT ON THE US NATIONAL DEBT

Step #1: Let’s understand and measure it.

When we think about the US national debt, it’s useful to break down the numbers in terms that we can understand.  Many economists use this analogy: imagine if your household earns $185,000 in annual income, you had no other debts, and you asked a lender if you could borrow $195,000.  Would this be reasonable?  Most lenders would say absolutely!  What would be the limit?  Would it be reasonable to ask for (gasp!) $210,000?  What about $250,000?  I think most lenders would still not have a problem at those levels.

Well, sovereign nations like the United States have national income and national debts.  The national income is called Gross Domestic Product (GDP).  This is the total value of goods and services sold in the economy.  In the US, our total national income is roughly $18.5 trillion per year.  Our total national debt is roughly $19.5 trillion (see chart).  However, part of our national debt is money that one department of our government owes to another department of our government… such as money that has been borrowed from the social security trust fund.  These debts are called “intragovernmental holdings”.  It would be sort of like imagining that the husband in our household owes the wife $54,000, and the household was asking to borrow $141,000 from outsiders.

The total debt that our government owes outsiders is roughly $14.1 trillion.  This is known as the “Gross Public Debt.”  This means that our public debt-to-GDP ratio is approximately 76%.  When economists and bond investors evaluate the credit risk of a sovereign nation like the US, they look at the public debt-to-GDP ratio.  As you can see from the chart below, the US public debt-to-GDP ratio is actually quite a bit lower than other countries across the world.  That’s one reason why interest rates in the US are so low, and why US government bonds are still very attractive for investors.  Generally, if a country’s public debt-to-GDP ratio is under 100%, the debt is considered to be manageable.  Once the public debt ratios exceed 100%, the debt burden becomes very difficult to manage.

In light of all this information, it’s probably not very intelligent to dance to the tune of politicians when they use scare tactics to talk about the “$19 trillion debt.”  A smarter approach would be to think about how we could keep the debt from growing to un-manageable levels.  That’s where Step #2 comes in.

Step #2: Two ways to improve it.

In order to determine if our debt burden could become un-manageable, it would useful to know what we are actually spending our money on.  Over 50% of government spending today is going toward Social Security, Medicare, Medicaid and other mandatory entitlement programs.  As you can see from the chart, in less than 20 years, the amount of money that we’ll be spending on entitlement programs and interest on our debt will be equal to roughly 18% of our national income (GDP).  Historically, 18% of our national income has gone toward federal taxes. 

This means that either:

1. We will need to increase taxes a lot from where they are today and where they’ve been historically; or,
2. We will need to reduce government spending on Social Security, Medicare, Medicaid and other entitlement programs.

Both of these options are very unpopular for government leaders to talk about.  It seems like they’d prefer to talk about things that have very little financial impact by comparison.  However, the sooner we have these difficult conversations, the better off our country will be.

So there you have it!  I hope that this special report has helped you to understand and think about some of the important financial issues at stake for our country.  Please contact me if you’d like to discuss how any of these things may impact your mortgage or housing strategy.