America’s Debt Problem Is Getting Worse

Over the past six years, the United States has experienced one of the largest expansions of federal debt in modern history.  While the economy has continued to grow, the pace of debt accumulation has dramatically exceeded the growth of real economic output. 

By most estimates, total federal debt has increased roughly ten times faster than real Gross Domestic Product (GDP) since 2020.  This growing imbalance raises important questions about the nation's long-term fiscal sustainability, future economic growth, and the burden being placed on future generations.  For current retirees, this debt will dramatically affect your retirement starting in as little as 5-years from now.

Now, real GDP measures the inflation-adjusted value of all goods and services produced in the economy and serves as one of the best indicators of genuine economic growth.  Federal debt, on the other hand, represents the cumulative amount the government owes to investors, institutions, foreign governments, and various trust funds. 

Ideally, debt should finance investments that enhance future productivity, allowing the economy to grow faster than the debt over time.  However, when debt consistently expands much more rapidly than the economy, the government's debt burden becomes increasingly difficult to manage.  Eventually it becomes impossible to manage.

Several factors have contributed to this trend. Massive pandemic relief programs expanded entitlement spending, higher defense expenditures, and infrastructure investments.  Add to this higher borrowing costs, and the nation’s debt goes parabolic while uneducated politicians continue to pander to the welfare class promising ever more “free” stuff.    

So, while the debt goes parabolic, real GDP struggles.  Since 2020, real GDP has grown $3.471 Trillion – a meager 2.62% compound annual growth rate (CAGR).  But federal spending has grown by $34.037 Trillion over the same period – 10 times the rate of real GDP.

What this means is that every dollar of real GDP that non-government employees generate in national wealth, the federal government adds another $10 of debt to buy votes from their favorite special interest group!  The Federal government is literally killing the American economy

One of the most concerning consequences is the rising cost of servicing that debt. As interest rates have normalized following years of historically low borrowing costs, the federal government is now paying well over $1 trillion annually in net interest expenses. 

Remember, interest payments do not provide new infrastructure, improve education, or enhance productivity.  Instead, they simply compensate lenders for financing previous deficits, leaving fewer federal resources available for other priorities.  Eventually the politicians see the writing on the wall and retire rich while taxpayers get absolutely crushed.

A growing debt burden can also reduce economic flexibility. During future recessions, financial crises, or national emergencies, policymakers may have less capacity to respond aggressively because debt levels are already elevated.  Anyone lending the federal government money will require ever higher interest rates to offset the risk of default – and that leads to a death spiral for the nation.

Now some will say that the United States is different.  Our currency is the world’s reserve currency; therefore, we can issue any level of debt without recourse.  Admittedly, the U.S. can get away with being financially illiterate for a season, but eventually the law of supply and demand comes calling.  Being a reserve currency does NOT suspend the laws of economics.

Ultimately, sustainable fiscal policy requires bringing long-term spending and revenues into alignment while fostering stronger economic growth.  But accomplishing that feat will require the Democratic Socialists of America and politicians of all stripes to actually read a book – something they’ve never has any propensity to do in the past.