(Mike Maharrey, Money Metals News Service) Every month, we report on the massive budget deficits. Most people yawn and move along. The reality is they don’t view overspending and debt as a big problem. After all, the debt has been growing for decades and nothing bad has happened.
But the problem with kicking the can down the road is eventually you run out of road. And the federal government is hurtling toward a dead-end fiscal cliff with its foot on the accelerator.
If the size of the national debt itself doesn’t concern you, its exponential growth should at least give you pause.
The Speed of Debt Growth in Perspective
Those of us of a certain age remember the “Republican Revolution” of the 1990s. It was largely driven by fiscal concerns and accusations that Democrats were taxing and spending us to death.
At the time, the national debt stood at $4.7 trillion. This represented a mere 64.5 percent of the GDP at the time.
And that was viewed as a problem.
Fast forward to today.
As of Jan. 21, the national debt stood at $36,218,258,403,326.35. According to the national debt clock, that’s 122.9 percent of GDP.
It seems like just yesterday, we were talking about the debt topping $35 trillion. That’s because it took less than 16 weeks for the debt to climb from $35 trillion to $36 trillion.
Here’s some more perspective.
Every president since Calvin Coolidge has left the U.S. with a bigger national debt than when he took office.
Between 1789 and 1981 (192 years), the debt grew to $ 1 trillion. That translates to a pace of about $ 0.005 trillion in accumulated debt per year. The debt-to-GDP ratio in 1981 was 31 percent.
Between 1982 and 2008 (27 years), the debt surged to just over $10 trillion as the pace increased to an average of $0.33 trillion of additional debt per year. The debt-to-GDP ratio in 2008 stood at 67 percent.
Between 2009 and 2024 (16 years), the debt exploded to its current level, with Uncle Sam adding $26 trillion in new debt, an average pace of $1.6 trillion per year.
Over 45 percent of the accumulated national debt was incurred in the previous 8 years.
During Donald Trump’s first term, the debt grew by $7.7 trillion, a 38.9 percent increase. Over the next four years, with Biden occupying the Oval Office, the debt grew $8.4 trillion, a 30.3 percent increase.
Trump has talked about shrinking government spending during his second term, but even if we’re optimistic and assume he can harness the cooperation of Congress and rein in spending, there is only so much he can do. Discretionary outlays only account for 27 percent of total expenditures. The vast majority is for entitlements, and there is little political will to take the scissors to Social Security or Medicare.
So, What’s the Problem?
Trump also has to work against a widespread perception that debt doesn’t matter.
James Madison disagreed. He called public debt “a public curse, and in a Rep. Govt. a greater than in any other.
Thomas Jefferson also disagreed. He called public debt “the greatest of dangers to be feared.”
So did George Washington.
“No pecuniary consideration is more urgent than the regular redemption and discharge of the public debt. On none can delay be more injurious or an economy of time more valuable.”
But why does it matter?
At some point, the world will decide it’s no longer interested in financing the U.S. government’s borrowing and spending. And as the Bipartisan Policy Center pointed out, the growing national debt and the mounting fiscal irresponsibility ultimately undermine the dollar.
“Confidence in U.S. creditworthiness may be undermined by a rapidly deteriorating fiscal situation, an increasing concern with federal debt set to grow substantially in the coming years.”
At least, this could lead to lower economic growth, higher unemployment, and less investment wealth.
And at worst…
We’re already seeing a sagging demand for U.S. Treasuries as the world raises its eyebrows at America’s fiscal trajectory. We seeing rising yields despite Federal Reserve rate cuts.
The central bankers at the Fed won’t say so out loud, but they have to factor in the massive national debt as they make monetary policy decisions. Uncle Sam needs low interest rates to finance its borrowing and spending binge.
Of course, the Fed is simultaneously trying to keep price inflation at bay. This requires higher interest rates.
This puts the central bank in a Catch-22.
And it could get worse. The federal government may ultimately need the central bank to step in with quantitative easing (QE)
In QE operations, the central bank buys Treasuries on the open market. This increased (artificial) demand drives bond prices higher and puts downward pressure on yields. But the Fed runs QE operations with money created out of thin air. The new money gets injected into the monetary system and the economy. This is, by definition, inflation.
When you boil it all down, the federal government has a big problem even if the economy continues on its present trajectory. Any kind of economic crisis will exacerbate the problem and push the car down the road even faster.
In the worst-case scenario, we could experience a dollar collapse.
We’re not to that point yet. We may not even be close. But we’re driving closer to the edge of that cliff with our foot on the accelerator.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
