$34 Trillion and Climbing

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Just before the start of 2024, the US Federal debt surpassed a new milestone: $34 trillion. In 2023 the US added $2.65 trillion in debt, the second largest annual increase in history after the 2020 increase of $4.5 trillion. Going back to 1995, Federal Debt has increased by just over $1 trillion per year, but since 2010 that number has jumped to $1.7 trillion annually.

The surge comes amid mounting warnings from credit rating agencies and a “soft” repudiation of both the US dollar and US government-issued securities.  

The time taken to surpass successive $10 trillion milestones has dropped. After crossing the $1 trillion dollar mark for the first time in 1981, the Federal debt didn’t surpass $10 trillion until 2008, 27 years later. It only took nine years to surpass $20 trillion (2017), then a mere five years to eclipse $30 trillion (2022). Now, 22 months after that, the US is almost halfway to the $40 trillion point. (It’s difficult to imagine that the US Federal debt was, well within many of our lifetimes, less than one-third the current market capitalization of Apple, Inc., but that is indeed the case.)

In a year where geopolitical hotspots are on the rise – Russia-Ukraine recently being joined by the Israel-Hamas war which is currently expanding across multiple fronts – of particular note is the ratio of the current US debt pile to annual economic output. At $34 trillion that ratio is 1.2, whereas the debt-to-GDP ratio at the end of World War II was 1.1 in an era of a managed gold standard with few international competitors. If a war footing were suddenly called for, only the colossal monetization of debt (if not the outright printing of money, and vastly higher taxes) would suffice.

The debt assumed over the last two years has additionally been incurred at much higher interest rates. The Fed began hiking rates on March 16, 2022, when the debt level had just surpassed $30 Trillion and the effective rate was 0.08 percent. The last $4 trillion of debt has been taken on at substantially higher rates, with the last $2.5 trillion sold at yields over 3 and 4 percent for 10-year maturities (Treasury bonds) and well over 5 percent at the short end (Treasury bills). The current debt service is in the neighborhood of $1 trillion per year annualized, double what it was less than two years ago and representing between 10 and 20 percent of the 2022 Federal budget. 

US Treasury Total Public Debt Outstanding (black) vs. Gross US Federal Debt to GDP Ratio (red), 2000 – present

(Source: Bloomberg Finance, LP)

It is wholly understandable that repeated warnings about the increasing debt incurred by the US government would fall upon increasingly disinterested ears. Consider the following article from October 1981:

The Treasury Department said a series of routine financial transactions during the day pushed the debt total beyond the symbolic trillion-dollar barrier. The debt figure had topped $999.3 billion last Friday, and then held steady for the next four business days as the Treasury’s redemption of old securities nearly matched its issuance of new ones … The 13-digit debt is an inevitable result of tax and spending decisions made by Congress months or years ago. In the past few weeks, as the debt total approached the new benchmark, political figures from President Reagan on down have invoked the trillion-dollar liability as a symbol of government spending run amok. “One trillion dollars of debt,” the president said in his televised address last month. “If we as a nation needed a warning, let that be it”…If the debt keeps increasing at the current rate, it will hit $2 trillion by the end of the 1980s. 

In 1981, the debt service was an unthinkable $15 billion per year. In 2023, the average daily increase in the Federal debt was $10.7 billion and from June 2nd to June 5th last year the national debt increased by $358 billion, over 20 times the entire annual debt service in 1981. Of the 248 market days in 2023, the debt increased on 144 of them by an average of $24 billion. On the remaining 104 days, it fell by an average of $8 billion. Three steps forward, one step back. 

Since the debt surpassed $1 trillion over 40 years ago, the claim has repeatedly been made that the end is near and that at some point in the near future the entire fiscal edifice would come crashing down spectacularly. But economists are legendarily bad at making predictions, and forecasting apocalypses is a particularly dodgy enterprise for our species. Personally, I am inclined to guess that whatever the end game of skyrocketing government debt is, the US is closer to it than to the beginning, but that too might be wrong. In October 1981 no one would’ve believed that 15-and-a-half thousand days and $33 trillion in debt later there would still be a market for US Treasury securities, or that the dollar would still be the global reserve currency (if increasingly under siege).

Perhaps a better tack to take regarding warnings about borrowing into oblivion is to ignore numerical benchmarks in lieu of expressing the following. First, the US government will never, ever, voluntarily cut spending. When at some point the issuance of Treasury bonds is no longer an option for some reason or another, some combination of the destruction of the dollar’s value and increasingly confiscatory levels of taxation will follow. For our self-preservation, American citizens will need to find a means of arresting the Beltway’s profligate instinct. Second, although only one-quarter of US government debt is currently owned by foreign creditors, the prospect of having our fates controlled by outside powers with interests that diverge vastly (and often in opposition) from ours should be menacing. At the very least, US citizens should consider what they are willing to live without or see others live without. Medicare? The US Coast Guard? Pension backstops? The Food and Drug Administration? Subsidies for just about everything? 

At this point, $35 trillion in US debt is baked in. Forty trillion, too, may only be a handful of insincere political diatribes away. 

Too much credibility has been squandered on the futile endeavor of predicting fiscal tipping points. Making the consequences of runaway debt clear – unprecedented levels of taxation, a browbeaten dollar, and unwelcome yet unavoidable foreign influence in domestic affairs – is likely a more effective, and more scientifically defensible, warning.