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Jacob Habbouch
October 21, 2021
The national debt has been somewhat of a topic for debate in Congress recently. For months, Republicans and Democrats have gone back and forth discussing how the debt ceiling should be raised. The Democrats have tried using the situation to pass a bill which would include their plans for multitrillion dollar healthcare, education, and climate change. Of course, the Republicans will not agree to this, which has led to somewhat of a stand-still. Janet Yellen warned Democrats earlier this week that the ceiling must be raised or else the U.S. wouldn’t be able to pay its bills starting in December. These bills would include pensions and paychecks to government employees. Under the pressure, Democrats agreed to raise the limit by $480 billion. Had the ceiling not been raised, a borderline government shutdown would commence in December. It is projected that this $480 billion increase will last until December 3, but this timeline has been scrutinized by some. For now, the solution is only temporary.
This is one of the many debates that originates from the increasing national debt. Investors may not worry so much about this particular issue in Congress, but it speaks to the bigger picture. The national debt is arguably the most important public policy issue in the U.S. The debt is directly tied to the U.S. bond market and indirectly to the U.S. stock market, valuing together at over $160 trillion. Usually, the issue many have with the U.S. debt is that it is rising too quickly. Some of the possible negatives of a rising national debt include: higher likelihood of the government defaulting on payments, increased riskiness of U.S.-based corporations, increased borrowing costs, and the possible loss of social, economic, and political power for the U.S. in the world. While these are certainly concerns, it doesn’t necessarily mean that rising debt is bad.
It makes sense for the national debt to rise. As the economy expands, there are more people, money, banks, and businesses that borrow money. In some ways, it can be good for a country to have growing amounts of debt, as it can indicate economic growth. A basic way to measure the national debt is in relation to GDP growth. This measurement can be useful to interpret whether investors should be concerned. However, an issue with this ratio is the difficulty to accurately measure GDP. There are several ways in which Gross Domestic Product can be skewed. The biggest issue being neglecting to include the production generated within households. This includes cleaning, food preparation, and home projects/building. As the U.S. has developed, these activities are more likely to be done by a third party and increasing the GDP. Therefore, even if there is no real growth, GDP will still rise because more production that was already done is now formally valued and recorded. GDP is also sometimes considered inaccurate because of the ignorance of externalities. There is a lot of resources utilized to control externalities and are not incorporated. These issues with the GDP make the comparison very difficult to assess and can give an inaccurate picture as to how sustainable the current national debt is.
Arguably the best way to get an accurate picture of the national debt is using a per capita measurement. Using this data, one can see that over the past decade, the debt per capita has risen to more than $86,000, which is a more than a 400% rise over the past 20 years. These figures may provide some evidence that the national debt is in fact reaching a concerning level. This is not necessarily an argument that the national debt is at an unacceptable amount, but this data does paint a different picture than a comparison to GDP.
The biggest impact which rising debt carries on the economy and the securities markets is increased risk. The more debt that is taken on by the U.S. government, the more risk that will be associated with the future payments of bonds they issue. In the future, we could see investors starting to demand higher interest rates on treasuries and T-Bills or even looking to international markets for more secure payments which they believe are truly risk free.
Investors can’t know for certain when a lot of debt is too much for the country, but it is certainly important to be aware of the ways to measure this large amount of debt. It’s vital for investors to be able to make a conclusion about the level of riskiness a given degree of debt poses to the markets they are involved in. While two strategies of measuring the national debt were mentioned, there are many others out there, which may be more or less accurate, and it's crucial to use several metrics to analyze and eventually make a judgment about this complicated topic.
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