Why The U.S. Won’t Pay Down Its Debt

Nearly $33 trillion. That's what the US national debt was as of early September 2023. At the end of July 2023, when the debt was about $300 billion less, roughly $7 trillion of that was intragovernmental debt holdings, meaning the government owes itself that money. The majority of the debt, about $25.7 trillion, was held by the public. The thing that we refer to as the national debt is really nothing more than an accounting record. It's keeping track of how many dollars the government has added

to the broader economy, minus how many dollars it has subtracted away from us, mostly through taxation. Is there a reason you should want debt to be zero? Precisely zero? No, there's no reason for that. Debt has many useful purposes. It's very useful for emergencies. The national debt increased by nearly 90% since the beginning of the pandemic. But many economists and politicians warn that the ever expanding national debt can be harmful to the economy. And unfortunately, we're using it for rainy

days and sunny days right now. We have to think about the interest rate on what we pay for our borrowing. We have to think about the growth rate in our economy. If the growth rate is faster than the interest rate, then that makes that debt more sustainable. The US economy certainly has the resources to pay down the debt over time, or at least to stop the increase in debt. But we need political action for that to happen. So why can't the US get a handle on its national debt? And does it even hav

e to? The majority of the US debt is held by the public in the form of government securities such as Treasury bonds, notes and bills. When the government borrows money, it does that by issuing a bond, which is a piece of paper that either says, I owe you this much money in the future or I'm going to pay you interest at these particular time horizons and then pay you back the full amount at some other time in the future. Government is giving us the ability to trade in some of the dollars that it

has supplied for a different kind of US dollar called a government security. The US dollar represents the reserve currency for the world, so lots of people want to own our treasuries. Treasury debt is considered an extraordinarily safe, secure asset, and somebody who's looking for a safe, secure asset would naturally be attracted to buy US government bonds. So public debt has always been used for emergencies. It's easier to finance by borrowing than to burden the current generation with taxes. W

e saw debt rise dramatically in the late 2000s after the global financial crisis, and we saw debt rise again during Covid. The debt in some ways is a contingency plan that we use to smooth out otherwise what would be big shocks to our economy? The problem is that we keep borrowing and borrowing and borrowing day in and day out. So we're not borrowing for emergencies. We're not borrowing only for long term investments. We're borrowing for immediate consumption. And any borrower, whether that's a

person or a business or a government, if you borrow for immediate consumption with no long term benefit, you're actually deteriorating your financial or fiscal future over the long run. What's really critical here is what they call debt to GDP ratio. That is your debt to the size of your economy. We're almost at 100% debt to GDP. Looking at an economy the size of the US, usually a stability number is around 70%. So why is looking at that ratio important? Because it really shows whether you can s

ervice that debt. Servicing the debt means paying back the debt and the interest on the amount to the lender. The reason interest rates matter is that because a government has to pay interest on its past debt, and as interest rates rise, those net interest payments start increasing dramatically. The Federal Reserve has been increasing interest rates since March 2022, with the goal of slowing down economic activity. When you raise interest rates, you have to pay more to service the debt. You can'

t do the national programs we need to do without incurring even more debt. The federal government paid $475 billion in interest on the national debt in 2022. That's nearly 2% of GDP. The Fed is pushing up interest rates, and this is feeding hundreds and hundreds of billions of dollars in additional income to bondholders. So people who are holding government bonds, paying higher rates of interest, are getting a huge windfall. Debt helps your economy because you can take on large initiatives like

infrastructure. You can take on crises like the pandemic, but you have to watch where your debt to GDP ratio is because that really is the stability indicator of whether you can actually service this debt or whether you're tilting the balance. There are good uses of debt. There are bad uses of debt. The public debt is one thing we're going to pass to the next generation. So is the quality of the environment. So is the infrastructure and roads and broadband and et cetera. So we need to balance bo

th the costs and benefits that we send to future generations. We're the wealthiest nation on earth, and we're basically taking resources that we don't have today and borrowing from the future. I think the biggest point of confusion or piece of misinformation about this thing we call the national debt is that it is somehow a burden to the rest of us. You'll hear people talk about the national debt burdening future generations. It ends up scaring people because you're thinking that the federal gov

ernment's budget works like a household budget and that if the government is borrowing and taking on debt, that somehow it's going to find itself in a situation somewhere down the road where it can no longer afford to pay the bills. And that's just simply not true. The government's budget doesn't work anything like a household budget.