The National Debt, the GDP, and You
Déjà Vu: National Debt Concerns Resurface
Recent media headlines evoke a sense of déjà vu: the resurgence of "Bennifer," a new Space Jam movie in theaters, billionaires funding space travel, and renewed discussions about the steadily rising national debt.
As of April 2021, the U.S. national debt stood at $28.1 trillion. This figure has continued to grow, reaching $35.3 trillion by September 2024. (Investopedia)
Measuring National Debt
While many headlines report the national debt in dollar amounts, it's often more insightful to measure it as a percentage of Gross Domestic Product (GDP). GDP represents the total dollar value of all goods and services produced by a nation over a specific time period. This metric includes personal consumption, private investments, government spending, and net exports. The debt-to-GDP ratio provides context for the debt level relative to the size of the economy.
For instance, in 2021, the U.S. debt-to-GDP ratio was projected to reach 102%. (Axios)
Understanding the debt-to-GDP ratio is crucial, as it offers insights into the country's ability to manage and repay its debt. A higher ratio may indicate potential challenges in meeting debt obligations without resorting to further borrowing or economic adjustments.
GDP & the US National Debt
The United States is projected to record a government debt equivalent to 107% of our Gross Domestic Product by the end of the year. The Congressional Budget Office predicts that the federal government could run a deficit every year for the next 3 decades, with debt reaching 147% of the GDP by 2049. This is a global trend, extending to other economies outside the US as well.
Let’s compare this to a household income. A lot of people try to overcomplicate the idea of national debt, but on a basic level it’s just like personal debt: if you spend more than you make, then you go into debt. If your household finances were functioning the same way as the US’ this year, you would have incurred a little more debt than what you make all year—and that’s on top of your regular expenses.
That Seems Bad...
If my personal finances mimicked the United State’s economy’s current debt situation, I’d definitely be sweating a little bit. But to say that operating with debt is the norm for the US is an understatement. You may find some comfort in knowing that the US has not been debt-free since 1835, when President Andrew Jackson paid off the $75 million US debt by selling land in the western part of the US and blocking all spending bills. This debt-free moment in the United States’ history lasted one whopping year. So the United States is pretty used to this.
The bailouts of 2010 and the COVID pandemic relief efforts caused a significant spike in our debt recently, but the US has operated in some sort of deficit for 55 of the last 60 years:
$381 billion in 1970;
$909 billion in 1980;
$3.2 trillion in 1990;
$5.6 trillion in 2000;
$13.5 trillion in 2010; and
$23 trillion in 2020
So... It's Fine, Then?
A lot of people assume that high national debt is a precursor to a huge economic disaster, but the reality is that high debt actually follows economic and financial disasters rather than precedes them. The real concern is not that high national debt will cause another disaster but that it puts the economy in a more vulnerable position for the next economic disaster (such as COVID).
Private sector debt, which is the debt held by households and privately owned companies rather than the government, is actually more concerning than the national debt when it comes to omens for financial disasters. Just like with a personal household’s debt, the amount that a business owes is less concerning than their ability to pay it off. Driven by historically low interest rates, private corporations have accumulated very large amounts of debt in the last few years, especially in the form of corporate bonds.
Soon, interest rates will rise which could trigger a wave of selling, and too many sellers with too few buyers could create a debt-related financial crisis. Classic methods of creating a resilient portfolio such as diversifying holdings is not necessarily going to be an effective strategy in this kind of market behavior, but Sean and our NEST team have years of experience and rely on data received weekly to anticipate and plan for these kinds of things so that we can pivot if it becomes necessary.
Reach out today if you’d like to discuss that further. Do your best not to let the national debt stress you out, but if the headlines get overwhelming, close the laptop and take three slow, deep breaths and imagine you’re with Ben and Jen on a yacht in Maui. Because if Bennifer has taught us one thing, it's that hope springs eternal.
DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.