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.
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.
And despite the issue being the “most predictable crisis we’ve ever had” according to former Speaker of the House Paul Ryan—a summary Dimon agrees with—it’s an item that isn’t yet top of the political agenda.
It’s also worth noting this isn’t the job of one party or the other to fix—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.).
Whoever’s shoulders it falls on to address, it’s clear the public now wants action.
Last year 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?
How big is the threat?
It depends on who you ask.
If it’s the Peter G. Peterson Foundation you’re talking to, the issue is pretty sizable.
The New York-based nonpartisan organization dedicates itself to increasing public awareness around fiscal challenges, with the increasing government debt being one of its top concerns.
The group 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.
Laura Veldkamp, a professor of finance at Columbia University, has a less catastrophic view.
She encourages the public to use real-world comparisons to understand the context around the headline-grabbing figures.
Professor Veldkamp explained to Fortune: “If the US were a household, we might measure its debt by the debt-to-income ratio. The debt is about 1.3 times the national income (GDP).
“The payment each year for federal debt interest is around 4% of the debt. This means the U.S. government needs to pay about 5.2% of GDP in interest expenses.
“Federal tax income is around 18% of GDP. So, the debt payments are less than one-third of the income. If this were a household or firm, we wouldn’t call that highly indebted.”
The far more difficult issue is whether or not this debt is being accumulated responsibly, and will result in a positive return in the future.
This is where JPMorgan boss Dimon gets concerned: in a slowing economy, can the government expect to see an uptick in output to offset the investment?
“Instead of focusing on the level of debt, we should be asking: What is the return on the investment?” Professor Veldkamp added. “If the government is issuing debt to invest in high-return projects, then debt is good. If it is not, then the debt will be tough to pay off because of low future productivity.”
And in The Deficit Myth, Stephanie Kelton, professor of economics at Stony Brook University, points out that public debt in the past has made economies more equitable and prosperous, but that scary words like “deficit” quell societies into not pushing fiscal support far enough for it to truly pay off on a large scale.
While Professor Kelton’s belief is a far cry from the doomsday opinions of some, she doesn’t advocate for limitless spending without cause or future societal payoff either, as investing in areas of the economy that are already working well merely results in inflation.
Could the housing market be impacted?
Housing, construction, cars and any other interest-rate sensitive sectors will be “disproportionately” impacted by an attempt to rebalance public debt, William G. Gale of the Brookings Institute told Fortune.
“Higher government debt will tend to raise interest rates,” the author of Fiscal Therapy: Curing America’s Addiction to Debt and Investing in the Future said.
“If government creates debt, it has to be financed somehow—taxes or money creation. If debt gets out of hand, money creation historically has been the (false) solution as it is easier to issue money than raise taxes but often more disastrous in the long term.”
Any rise in interest rates will shock younger generations coming up the housing ladder over the next few decades.
While many economists point out the controversial Fed rate hikes of the 2020s are merely normalizing the rates of many eras before, homeowners and prospective buyers have grown accustomed to a Federal base rate of effectively less than 1%.
Beyond having negative psychological impacts, rising rates is also bad news for the already unattainable market.
According to the latest National Realtors’ Association index, the median family income is $99,432 while the median amount needed to qualify to buy a home is $105,504.
Will public debt impact America’s national security?
This is a long-held fear from experts in the field.
More than a decade ago when national debt sat at a measly $19 trillion, America’s former joint chiefs of staff chairman Admiral Michael Mullen said debt was the top threat to national security.
Fourteen years on, former Speaker Ryan told the Bipartisan Policy Centre in January that before long the government will be spending more on servicing its debt than it is on investing in the Pentagon.
Dimon added: “This is about the security of the world. We need a stronger military, we need a stronger America. We need it now. So I put this as a risky thing for all of us.”
Couldn’t the government just keep spending?
If the government’s racked up this level of debt and the economy is still surviving—after all, inflation is down, jobs are steady, consumers are in ‘decent shape’—some might question why politicians can’t keep spending seemingly without confidence.
There are a couple of issues with that.
The first is well known: the government has a self-imposed debt ceiling which it cannot spend above, and it needs congressional approval to raise or extend it.
This is a fairly regular occurrence—it’s happened 78 separate times since 1960—however, negotiations reached the eleventh-hour last summer when Republicans pushed hard for promises from President Biden’s government to reign in spending.
When the issue comes around again just after the 2024 election, a deal may be more difficult.
The other issue is that, at some point, investors may no longer want to buy government debt if they fear the government won’t be able to pay it back.
That’s a primary concern for Joao Gomes, senior vice dean of research and Professor of finance at the University of Pennsylvania’s Wharton School.
“The most important thing about debt to me that people to keep in mind is you need somebody to buy it,” Gomes told Fortune. “We used to be able to count on China, Japanese investors, the Fed to [buy the debt.] All those players are slowly going away and are actually now selling.”
America’s ability to pay its debts is a concern for the nations around the world that own a $7.6 trillion chunk of the funds.
The nations most exposed are Japan, which owned $1.1 trillion as of November 2023, China ($782 billion), the U.K. ($716 billion), Luxembourg ($371 billion), and Canada ($321 billion).
“If at some moment these folks that have so far been happy to buy government debt from major economies decide that ‘You know what, I’m not too sure if this is a good investment anymore, I’m going to ask for a higher interest rate to be persuaded to hold this’ then we could have a real accident on our hands,” Gomes said.
He added: “The moment the government in any country realizes that it cannot sell $1.7 trillion in [annual] debt anymore, you will have to impose major cuts on some programs. That opens a Pandora’s box of social unrest that I don’t think anybody wants to think about.”
This story was originally featured on Fortune.com