Transcription
This is America, and that is the US Treasury. Here, the national debt has exceeded GDP for the first time since World War II. It costs the government $1 trillion a year in interest alone. Is the government gambling with the world's largest economy? And can it bring that ever-increasing number under control? I'll be back with more on that later. But first, here's Silvanier in our Washington studio.
Alex V, thank you very much. The United States is the most indebted country in the world. Almost every year in my lifetime and yours, the US government has chosen to spend more money than it collects, sometimes a lot more. Over decades, that builds up, and the national debt now stands at $39 trillion, exceeding the entire US economy. Now, that is something we have not seen since World War II. Is it sustainable?
US President Donald Trump, who has added to the debt himself, has flagged it as a vulnerability for years. "We have found over the last seven years, we have found tremendous wealth right under our feet. So good, especially when you have 20 trillion in debt. The Obamacare repeal and replace plan would significantly reduce the federal deficit. When I heard we were going to Iraq, somebody said, 'Oh, we're going for the oil.' $15 trillion. That does a lot to solve our deficit problem, doesn't it? Growth is the way. If we grow like this, we go from having at 37, 36, 37 trillion, we go from having high debt to low debt."
"I will bring our energy companies back. They'll be able to compete. They'll make money. They'll pay off our national debt."
So, $39 trillion, that number is enough of a concern in the US that it's posted on websites, billboards, and bus stops where everyone can track the debt live. Alex B walks us through the number and what it means.
"Blessed are the young, for they shall inherit the national debt." That was President Hoover in 1936. And that blessing per person is getting pretty big. Keep following our counter in the corner there for just how fast that's growing on average. But in the meantime, let's break down what that number means.
The national debt is similar to a person using a credit card and not paying off the full balance each month. That means the federal government can pay for services even when it doesn't have money. And why wouldn't it? Experts say it's down to an aging population, rising healthcare costs, and a tax system that doesn't generate enough revenue. Basically, US Treasury doesn't have enough money to pay the bills.
Right now, US national debt is so big, it's larger than the entire economy of the country. Around one-third of that publicly held debt is owned by foreigners. The top three countries: Japan, the UK, and China. The rest is held here at home, mostly by government trust funds, big financial institutions, and the Federal Reserve. They own around 16% of that number, still ticking away up there.
But it wasn't always that big. The US has been in debt from the start, nearly 250 years ago, due to revolutionary war costs. By 1835, that had all been paid back, and that was the last time debt was at zero. It hit $1 billion in 1863 during the Civil War, $500 billion in the mid-70s, and that doubled to a trillion by the 80s. Since then, debt has ballooned and fast. And in the last couple of years, annual interest payments hit $1 trillion. That's a lot of money, and there's still no plan to actively pay it back.
Instead, the government repeatedly raises the borrowing limit through Congress. That's the debt ceiling you hear about every couple of years. When Congress doesn't agree on a budget in time, that's when you get a government shutdown. But if they don't play ball on that debt limit, it would be even worse. That would be a US government default. That hasn't happened yet, but as that number keeps growing, so does the fear that it could.
Now, the national debt's practical impact on Americans, that's hotly debated by economists. Its most visible consequences are higher borrowing rates and the concern that future generations will end up paying the price. Heidi Joe Castro reports.
"If you ask the average American about their country's national debt, few would tell you that it is a primary concern. But ask anyone trying to buy a car or a house or anything that requires a loan. Well, the interest rate that they pay is linked to the interest rate the government pays for its own growing debt."
"I'm going to show you this one house that sold in my neighborhood."
Ayana Brick House is a real estate agent in Springfield, Virginia. She's seen less buying and selling of homes as mortgage rates have risen in recent years. That's because mortgage interest rates are pushed up by Treasury yields, which are pushed up by the national debt. "I'm really concerned about it because it means that it's, it's, it's harder for people to buy to see the American dream as an American. Like, part of how people have built their wealth is through real estate."
The national debt can lead to higher borrowing costs for loans that touch many aspects of American life. And currently, the average US household debt is $105,000. Gail Austin Lancaster is picking up free food from MANA, a community aid group in Maryland. She says the US economy is in bad shape due to Washington's recent policies. "With Trump in, hold on to every cent you can."
And she worries the national debt will become future generations' pain. "President after president has postponed dealing with the problem, but eventually the US will have to raise taxes, cut services, or default. And then my grandkids, I feel sorry for them that they're going to have to go through additional, um, challenges." As a retired accountant, she stresses personal fiscal responsibility. She wishes the US government put more emphasis on the same. Heidi Joe Castro, Al Jazeera, Silver Spring, Maryland.
Now joining us now to discuss this, economist Nicholas Loris is with us in the studio, and Jeff Ferry is chief economist emeritus at Coalition for a Prosperous America. So gentlemen, let's start with this. Um, how concerned are you on a scale of 1 to 10 about the US national debt? How worried should we be?
"Yeah, I'd say it's about a nine. I mean, when I first started working in Washington D.C. 20 years ago, it was a concern, and it's only gotten worse. And I think, uh, it's not just the fact that we're talking about this 100% number of GDP. It's really the continued trajectory of where we're going. If you look at estimates by the Congressional Budget Office, um, academia, if you look at nonpartisan think tanks, it's only getting worse. And it could be, you know, as high as 117% u by 2034. It could be up to 120% u by 2036 in the next decade. And then you're talking about 176% of GDP over the next 30 to 40 years. So the trajectory is really concerning from a fiscal standpoint."
Jeff Ferry, what's your level of concern?
"Well, I wouldn't say it's nine, but I'd say it's about six or seven. And I share many of Nicholas's concerns. I think, you know, debt continues to grow, and it will be a burden that our children or grandchildren will have to pay back at some point. It'll be a burden for them. But I think what worries me most of all is congressional irresponsibility. I mean, we had the Biden administration raise the deficit level, which adds to the debt each year, to two trillion a year. We now, or I should say the Democrats did that, and now we have the Republicans who've maintained a $2 trillion deficit adding to the debt every year. And so, you know, like children who are out of control, when Congress gets in the habit of, of raising, of designing a budget that has a $2 trillion deficit every single year, it's hard to to get them to control it and to return to sanity. And it's, it could take an international crisis to return our government to sanity in terms of debt and spending and borrowing and taxation, which all go together."
Yeah. So those are some of the things that we want to explore. You both agree that the size of the debt relative to the US economy is just going to continue to increase. And we've asked why that's a problem. So what are the dangers of allowing the national debt to continue at such a high level? Is it a financial catastrophe waiting to happen? Yes? No? We had a 9 out of 10, 6, seven out of 10. What could lead to a tipping point? Richard Gaseford considers the issues.
Well, if any one of us let our finances get out of control, ran up a big debt that we couldn't afford to pay back, then we'd be at risk of losing our homes, our businesses, and having to fend for ourselves. But that's not the case for governments that can keep borrowing to cover their expenditure when their income doesn't match their outgoings. Well, they might look to cut public spending, but far too often they kick that can down the road, knowing at some point it'll be someone else's problem.
Well, with national debt now equating to roughly $288,000 per household, will the US ever reach breaking point? And for how far and for how long can they keep on kicking that can down the road? Whilst the dollar remains the global reserve currency, there are plenty of investors wanting to buy it through US-issued bonds. But if the world fell out of love with America and its greenbacks, well then the government would be forced to pay much higher interest rates on its debt. That could certainly put a squeeze on spending for things like education, defense, and health. In fact, the US government already spends more servicing its debt than it does individually for defense and Medicaid.
The nonpartisan Committee for a Responsible Federal Budget is worried. It forecasts that within five years, the average amount of interest paid to service the national debt could exceed the amount of economic growth in the United States, and that would lead to a debt spiral. Well, there's widespread agreement that that level of US national debt is unsustainable. But with it forecast to grow to 175% of the country's economic output within 30 years, it seems there's still no consensus on how to deal with it. They'll keep on kicking that can down the street. Richard Gaseford, Al Jazeera, Washington D.C.
Nicholas Loris, you heard our correspondent there asking the question, could the US ever reach breaking point? What, what would it take? What would cause the US to reach breaking point? What does that even look like?
"Yeah, it really looks like the bond market saying enough is enough. And, you know, as that segment mentioned, the world not trusting, uh, the US economy as it continues to do so. Now, uh, if the bond market, you know, spirals, if interest rates increase, if we see kind of runaway inflation for the runaway inflation for the, uh, continuous future, uh, you know, I think that's going to bring even more skepticism from the international markets. And, and if that bond market kind of really starts to spiral and, uh, the international markets say enough is enough, um, that's when we really see some sort of fiscal crisis, and we're going to have to address a flooded house. And so what that looks like, I think, is really, um, you know, catastrophic levels of, um, economic stagnation if, if we are ever to get there."
So you talk about the bond market. I want to make sure everybody who's watching this follows this. This means the people who hold, the people or the countries who hold US foreign debt. Correct?
"That's correct. Yes."
Or American, like your everyday American investor who's going to buy US debt and US bonds and can do that on a minute-to-minute basis right on his app or his, his computer screen or through a broker. And then about a third of it is held by international creditors. So you have Japan, the UK, China. That's what you're referring to.
"Correct. Yeah, exactly. And so if that market essentially says we don't trust the US anymore, we don't want to hold that debt. Um, what's going to happen for the ability to to borrow in the future? And the, the reality is, I don't, I don't think economists know when that looks like. I mean, there is projections from Wharton, you know, the business school at the University of Pennsylvania, that says that could happen anywhere in the next like 20 to 30 years. That are some, that the projections span out to 2070 when the bond market really starts to take a serious look, um, at, at a potential crisis. And so again, we're kicking the can down the road. I think that speculation and uncertainty leads to even more can-kicking, and that's what makes this so difficult to deal with along with all of the congressional dysfunction that we see in Washington D.C. with how to tackle and address this crisis."
Jeff Ferry, the concern that you expressed earlier was about a possible international crisis. What did you mean?
Okay. I think that the way in which you could see an international crisis is that, as you suggest, as you said, about 30% of Treasury bonds are purchased in any given year by foreign investors, and a significant number are purchased by American mutual funds and hedge funds and financial actors. I mean, it's not really appropriate to think of individual investors as enabling the government to support this $31 trillion debt. The debt is supported by mutual funds and other kinds of funds all over the world. And in my view, and, you know, hedge fund, various hedge fund managers in New York share this view, it typically takes a triggering event for this to happen. And, you know, there could be any sort of triggering event. It could be a financial event where, you know, the Medicaid budget comes in much higher than anybody expected and Congress is in a quandry. Or it could be a military event where some country invades an island and the American government decides it's not going to defend that island and somebody says, "The reason is because they can't afford it." And then everybody then, all these funds say, "Treasury bonds are headed for a decline now. I need to sell." And this is very common. This sort of panic happens in financial markets. Other countries have had this problem afflict them. US states in the 19th century had this problem too, where they couldn't pay their debts and they needed to default. If everybody rushes for the door, by which I mean everybody tries to sell Treasuries at the same time. And by the way, we had a miniature example of this in 2020, I think it was, and the Fed stepped in quietly and actually bought up all the bonds to enable people to rush for the door in my metaphor. And that averted the crisis because it only took a couple of days of the Fed buying up bonds and the market returned to normal. And that crisis was triggered by the COVID panic, right? Which meant, you know, if you shut down your economy, your tax revenues kind of stop. And so, so investors had that panic. Fed stepped in and solved that problem. Then they did very well in that crisis. But there could be another kind of crisis which could be too big for the Fed to handle. And once that happens, once you see, um, people selling Treasuries and interest rates skyrocket.
When... So this is where, you know, the, the guy sitting at home or the, the woman, the family sitting at home says, "Why does that matter to me? Treasury bond fluctuations." Well, it does because the Treasury would then be forced to raise interest rates. And, for example, right now, you, the long-term interest rates around 4% for a 10-year. So they could easily, that could easily in a crisis double to 8%, in which case all sorts of interest rates rise.
Pause there for a second. I want to make sure that everybody follows. What you're describing is the nightmare scenario where the creditors who currently hold these $39 trillion of US debt, which as we've explained is the same size right now as the US economy and over time is going to get even bigger than the size of the US economy, if the people who hold that debt, countries and people and institutions, as you said, mostly institutions, they suddenly start to sell it, right?
Continue.
If they suddenly, if there's a, a true crisis, a real panic, and they start to sell, and the Treasury cannot sell the debt except by raising the interest rate, interest rate on the debt to 6%, 8%, 10%?
Then what?
Then you see all the interest rates in the economy rise. You will see a recession. You will see, you will see a panic. The, the, the Secretary of the Treasury will turn around to the President and say, "We can't afford the $7 trillion budget right now. The only way to get people to buy these bonds is to start cutting spending dramatically." And that's where the accountant woman on your TV segment was right. She's an exact accountant. She understands when a panic happens, you've got to cut spending in an emergency.
Cut spending on education, on military, on infrastructure, on everything that the government spends money on.
Correct. And that's where the economy shrinks. Um, this is the nightmare scenario that we've just kind of detailed. Nicholas Loris, is it, that's possible, but do you think it's likely?
"You know, I think it's becoming increasingly likely as that number grows above 100%, the, you know, the amount of debt that we have, and it continues to grow larger than the economy. Um, I do think it becomes increasingly likely. Again, I, I think Jeff's exactly right is, is some sort of triggering event could be kind of the ignition, uh, for that concern. And it is really the federal government, you know, potentially saying, we can't afford this, we can't pay this. Right now, uh, if you look at the market response to, uh, the debing, you know, the size of the economy, the markets didn't really move that much, um, but if there is that trigger..."
They knew it was coming. I mean, yeah, exactly. And so, yeah, it's a little bit, you know, it's not a heart attack, it's a little bit like diabetes that we're dealing with. But that diabetes in this scenario can kind of lead to that heart attack scenario where there's this trigger event, and then all of a sudden we're, we're dealing with an economy that is in, in terrible fiscal health.
So you look at this, and I think anybody at this point would be wondering, how did we get to this? I mean, if this, if this risk, which is a major risk, it exists. We said probably not likely at this point, but the risk exists. How did we get to it?
It's because the debt is so big, $39 trillion. Since the US first established its financial foundation in 1790, the country has almost always been in debt. Back then, it was only about $71 million. Look at this graph. As you can see, over the next almost two centuries, that debt stays pretty flat. It does grow more perhaps than the graphic suggests there because of the scale, but it grows very slowly. Then we get to 1980, and that's when things change. Things start to grow exponentially. In 1980, the debt at the time is $98 billion. By 1990, that has more than tripled to $3.2 trillion. By 2000, that has almost doubled. 2010, it doubles again. And again by 2020 to almost $27 trillion. And in the first half of this decade, so this brings us to where we are now, the national debt has grown by another $11 trillion. So basically, what we're seeing is that since 1980, every decade it doubles or even sometimes triples. Why? What happened in the last almost 50 years for that to change?
"Yeah. Well, you know, I think a few things. And really, I think if looking at especially at the Bush administration in the year 2000, which doesn't date back all the way to the 80s, but it was like he said, we wanted to win the wars at any cost. And so I think it, you know, the 1980s became kind of like a license to spend a little bit more while realizing there wasn't any political repercussions for doing so. You know, we saw a little bit of that, um, during the Obama administration years with the Tea Party movement and wanting to rein in the size of government. Um, but the reality is these programs continue to grow. Um, we, you know, certainly Medicare and Medicaid and Social Security continue to grow, continue to be a big weight, um, on the national debt, uh, and the political incentive to really do anything about it, uh, becomes diminished. And I think there is a little bit of a boy who cried wolf situation here too, is that this debt continued to grow. You know, politicians, some of them waved their hands that we need to do something about this. The people did, and we haven't done anything, and there hasn't been any financial collapse, um, or any type of economic crisis as a result of the debt. We've certainly had some issues, but not as a result of the debt necessarily. And so I do think that the American public are still kind of lulled into a sense of comfort and the inability to really worry about this as the way that we should be worrying about it."
So we wanted to look at US government spending decisions over the last quarter of a century. And the biggest driver of debt is the federal budget and whether it's in deficit or in surplus. Now, it turns out the last time the federal budget was in surplus was 2001, a quarter of a century ago, under Bill Clinton. Since then, it does not matter who is president, Republican or Democrat. Bush, Obama, Biden, Trump. The budget has always been in deficit. That means the government is always spending more money than it brings in. And notice the two moments on on this graph where annual spending really increases sharply. First, you have 2009, budget deficit reaches almost $1.8 trillion. And that reflects emergency spending following the 2008 financial crisis. And another massive deficit after a massive global event, that's in 2020. The deficit then exceeds $3 trillion for one year alone, and that is the year of the COVID pandemic.
So Jeff Ferry, it turns out that, you know, there's there's your planned spending, but then each time there's a crisis, whether it's military, financial, a pandemic, then governments want to dig deep into their pockets and and debt doesn't really matter anymore. They're willing to spend whatever it's going to take.
"Well, I would, I would say it's a little more complicated than that. I think there are two good reasons for governments to run deficits and build up debt. And those two good reasons are, first of all, if you're engaged in long-term projects, if you're building a highway system, if you're bu, if you've got a NASA space program, which is a 20-year program, and you foresee at the end it's going to pay returns, then just like a private company would borrow money to build a factory, it's appropriate for the government to borrow money to build highways and bridges and space programs and defense projects if they're going to last for 10 or 20 years. And many of our defense airplanes and tanks and so on do last for a long time. So that part makes sense."
That's good debt. What you, you describe as investment. Investment for the future, right?
"It's investment for the future. The other, the other occasion is when you have a recession. We know from economics that if the government spends money during that recession, it can boost the economy and speed up the recovery from recession. And this is often called Keynesian economics. And a British economist John Maynard Keynes put forward these ideas, which were seized on in the 1930s by the Roosevelt administration. Now, Keynes was very emphatic that at the time of, um, a boom, when the recession is over, the government should cut back spending and not run a deficit and even consider running a surplus. The problem is, these, these governments, as you pointed out, whether it's, um, really Biden and Trump are the two worst offenders, as, as Nicholas says, the Bush administration was guilty too, but, um, being a young man as I am, Biden and Trump are fresh in my mind. And, and the problem is they don't grasp that simple logic. And they, and the Congress, again, I come back to politics. Politicians are too partisan. Every time a Republican gets elected, they want to cut taxes irrespective of what happens on the spending side to get elected. And every time a Democrat gets elected, they want to increase spending without thinking about the taxes that are going to pay for that. So that's where the source of the problem is. But as I say, in some circumstances, deficits make sense. And we fought World War II. We invested an awful lot of money. The Roosevelt and the Truman administration, and debt was then, as, as I think you said, over 100%. But, you know, that was in 1946. It hit about 100%. But within a couple of years, it came way down because the politicians and the public said, "Yes, we have to accept higher taxes to pay down this debt, and we have to work a little harder for a couple of years." It's awfully hard for politicians to tell Americans they need to work a little harder these days."
Nicholas Loris, we have about a minute left. How, if the federal government, this president or the next president, wanted to bring down the national debt, right? If that were his priority, how would he or she do it?
"Yeah. In a minute. Uh, you know, I think, you know, it's a really a combination of factors. You know, we do have to get discretionary spending under control. I mean, we, if we don't address Medicare, Medicaid, and Social Security and actually look at hard reforms, uh, it's just never going to happen because those three programs alone, um, are, are going to balloon the debt moving forward without structural reforms that get it back into place. And I think it's going to..."
So that's cutting government spending, key things like, you know, retirement benefits and health.
"Exactly. But we have to. And I think looking at alternative scenarios, you know, where we're raising the retirement age and the time when people can collect Social Security. Um, looking at more private options, I think that we have to have those conversations, you know, especially in the population cycle we're in now with baby boomers retiring and younger people having fewer kids. This situation, especially with regard to Social Security, is only going to get worse unless we fix some of that, that spending imbalances."
Okay, that, that's your fix. That is not the direction of travel, I have to say, for the, the current state of the US federal budget and the US economy because you both pointed out earlier in this discussion that right now the debt is projected to continue increasing relative to the size of the US economy. Uh, Nicholas Loris, thank you very much. Jeff Ferry, thank you very much to you as well for joining us, both of you, in the studio today for this discussion. And that's all from us here in our Washington studio, looking at whether the ever-growing US national debt is sustainable. Let's go back to Alex Baird for a taste of what's coming on our next edition, and then to Al Jazeera's global headquarters in Doha.
Thanks, SRL. On the next edition of This is America, redrawing the maps. How redistricting efforts could determine if the Republicans maintain control of the House in November's midterm elections. That's Thursday at 18:30 GMT or 2:30 p.m. Eastern here in the United States. Bye for now. Oh.