{"id":7993,"date":"2021-02-01T07:44:14","date_gmt":"2021-02-01T12:44:14","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=7993"},"modified":"2022-02-27T17:54:32","modified_gmt":"2022-02-27T17:54:32","slug":"worried-u-s-debt-levels","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/worried-u-s-debt-levels\/","title":{"rendered":"Should We Be Worried About U.S. Debt Levels?"},"content":{"rendered":"

Over the past four years, U.S. government debt held by the public has swelled from about $14 trillion to over $21 trillion. Debt as a percent of U.S. GDP now tops 100%, meaning our debt exceeds our annual output. Debt as a percent of GDP has not been this high since World War II (chart below), when the U.S. economy was firing on all cylinders for wartime production.1<\/sup><\/p>\n

Debt as a Percent of GDP Now Tops 100%<\/strong><\/p>\n

\"\"<\/p>\n

Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/p>\n

Having debt at 100+% of GDP places the United States in the ranks with countries like Greece, Italy, and Japan. For many investors, this alone is troubling.<\/p>\n

Over the long-term, I fully agree the current path of debt accumulation and deficit spending is not sustainable. With Social Security and Medicare\/Medicaid payments also ballooning, the U.S. is on track to have debt be 200% of annual GDP by 2050. Never-ending deficit spending and exorbitant debt to GDP ratios will make any country\u2019s debt less desirable, pushing interest rates higher and higher in the process. The cycle cannot continue forever.<\/p>\n

Short-term, however, I do not see many problems with the United States borrowing more and spending more at the federal level. In fact, if there were ever a time to spend our way out of a crisis, now is probably it. Allow me to explain.<\/p>\n

In 2020, U.S. debt increased by $4 trillion, which marked a significant 25% jump from 2019 levels. Here is the kicker, however: while absolute levels of debt increased dramatically, the interest payments on that debt decreased by 8%.<\/em><\/strong> For new or existing homeowners who decided to refinance or buy a second home (or a bigger home) during this period of ultra-low interest rates, you can understand the appeal of borrowing more when it\u2019s inexpensive to do so.<\/p>\n

To offer a contrasting example, the last time the U.S. ran budget surpluses was in the 1990\u2019s, when 10-year U.S. Treasuries \u2013 and by extension borrowing costs \u2013 exceeded 6% for most of the decade. Inflation was also a concern. In periods like the 90s, when the economy was also expanding at a strong clip, deficit spending was not needed nor was it incentivized. In a sense, it is the opposite of what we have today.<\/p>\n

As a general rule, if the economic growth rate is higher than long-term interest rates (10-year and 30-year U.S. Treasuries), then countries should be able to run moderate budget deficits while maintaining a reasonable cost of servicing debt. Today, we\u2019re expecting 2021 and 2022 GDP growth in excess of 2%, and as I write the 30-year U.S. Treasury is 1.80%.3<\/sup> The cost of servicing debt should remain very manageable and relatively attractive in the coming years, in my view. But the window will not last forever.<\/p>\n

Bottom Line for Investors<\/strong><\/p>\n

The key takeaway here \u2013 and the reason not to worry about debt and deficits now \u2013 is that the U.S.\u2019s ability to borrow and service debt at a very low cost (interest rates) matters more than our absolute level of debt.<\/p>\n

In a debt crisis, investors would worry about a country\u2019s ability to make interest payments and repay debt, which would push interest rates higher \u2013 not lower. You may remember Greece in the years following the 2008 financial crisis when bond yields soared and the country could not sell bonds in the debt markets. The European Central Bank had to step in to buy Greek debt and backstop outstanding debt, and eventually, Greece was able to re-enter the debt markets.<\/p>\n

The United States does not have this problem today. As the most diverse and wealthiest economy in the world, I think it\u2019s clear that global investors not only want our debt, but covet it. In spite of all of the world\u2019s and the U.S.\u2019s current problems, U.S. Treasury bonds are still considered among the safest investments in the world. This notion may puzzle many investors given the political\/economic climate, but you don\u2019t need to take my word for it. Just look at our interest rates.<\/p>\n","protected":false},"excerpt":{"rendered":"

Over the past four years, U.S. government debt held by the public has swelled from about $14 trillion to over […]<\/p>\n","protected":false},"author":3,"featured_media":7908,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7993","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7993","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7993"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7993\/revisions"}],"predecessor-version":[{"id":8681,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7993\/revisions\/8681"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7993"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7993"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7993"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}