Introduction

In the late 19th century Alexander Hamilton wrote “national debt, if it is not excessive, will be to us a national blessing.” A nice idea in theory, but America’s governments since then haven’t quite stuck to the plan. Instead, the U.S. economy is resting atop a public debt exceeding $34 trillion, with its debt-to-GDP ratio sitting at around 120%. Perhaps not the blessing the Founding Fathers had once envisioned. Now, alarm bells are beginning to ring with increasing frequency and volume.

Signs of Concern

Jamie Dimon says Washington is facing a global market “rebellion” because of the tab it is racking up, while Bank of America CEO Brian Moynihan believes it’s time to stop admiring the problem and instead do something about it. Elsewhere, The Black Swan author Nassim Taleb says the economy is in a “death spiral”, while Fed chairman Jerome Powell says it’s past time to have an “adult conversation” about fiscal responsibility. Despite being the “most predictable crisis we’ve ever had”, the issue is not yet top of the political agenda.

It’s worth noting that this debt has been accumulated courtesy of spending by both Republicans and Democrats. The list of presidents who added the most debt by percentage begins with FDR (Dem.), followed by Woodrow Wilson (Dem.) and Ronald Reagan (Rep.).

Growing Public Concern

Pew Research found that ‘reducing government debt’ was a key concern for 57% of the 5,152 people surveyed—up from 45% just a year prior. But do individuals—who currently have a sum of more than $100,000 dangling over their heads when debt is divided by capita—need to be so concerned about the issue? How will it impact their purse strings, their living costs, and their savings plans?

The Magnitude of the Threat

The Peter G. Peterson Foundation believes debt could lead to reduced public spending, private investors losing faith in America’s economy, a shrinking window of prosperity for U.S. families thanks to worsening housing and jobs markets, and a threat to national security. On the other hand, Laura Veldkamp, a professor of finance at Columbia University, encourages the public to use real-world comparisons to understand the context around the headline-grabbing figures. She explains that when measuring the debt-to-income ratio, the U.S. debt is about 1.3 times the national income (GDP), and the debt payments are less than one-third of the income, which is reasonable debt for a household or firm. The real issue is whether or not this debt is being accumulated responsibly and will result in a positive return in the future, which JPMorgan CEO Jamie Dimon is concerned about.

The Impact on the Economy

Stephanie Kelton, professor of economics at Stony Brook University, points out in her book, The Deficit Myth, that public debt in the past has made economies more equitable and prosperous. However, she emphasizes that spending without cause or future societal payoff could result in inflation. Therefore, it is crucial to evaluate if the government is using the debt to invest in high-return projects. Additionally, the attempt to rebalance public debt will disproportionately impact housing, construction, cars, and other interest-rate sensitive sectors, causing a rise in interest rates, which could negatively affect younger generations striving to enter the housing market.

National Security Concerns

National debt has long been considered a top threat to national security. Admiral Michael Mullen, America’s former joint chiefs of staff chairman, stated over a decade ago that debt was the top threat to national security. More recently, former Speaker Paul Ryan voiced concerns that the government will soon be spending more on servicing the debt than on investing in the Pentagon. The security of the world relies on a stronger military and a stronger America, making the debt a risky issue for all.

Limitations and Potential Consequences

While the government has a self-imposed debt ceiling which limits its spending, negotiations to raise or extend it can be challenging. Moreover, at some point, investors may lose confidence in the government’s ability to repay the debt, resulting in higher interest rates and potential difficulties in selling debt in the future. This raises concerns about America’s ability to pay its debts and the potential impact on the global market, emphasizing the importance of taking action to address the issue.

If investors grow uncertain, they may seek higher interest rates, leading to a real accident with major cuts on some government programs. This could cause social unrest and economic repercussions.

Conclusion

America’s public debt has reached unprecedented levels, causing increasing concerns among experts and the general public alike. While the impact and severity of the threat may vary among opinions, it is evident that immediate action is required. The government must carefully assess the return on investment and prioritize spending on projects that yield positive results for the economy. Balancing the debt is crucial to avoid disproportionate impacts on interest-rate sensitive sectors, such as housing. Moreover, the looming threat on national security cannot be ignored, warranting a proactive and responsible approach to address this multifaceted and complex issue.