One hundred and five percent of GDP: This is the value of the total debt owed by the United States. Put differently, the value of the debt burden owed by the United States government is five percent larger than the total value of all production and consumption in the U.S. economy during the course of an entire year. We are not just talking about profits—not just the growth of economic activity over and above some baseline. No, the debt burden of the federal government is larger than the U.S. economy itself.
Why does this matter? For one thing, in 10 years or (probably) less, the government will spend more on servicing the interest on the national debt than on defense. And this assumes the veracity of the rosiest of interest rate and economic growth predictions. If the economy enters a recession and interest rates rise faster than expected with the Fed’s ever-so-gradual “tightening,” then the coming debt explosion will arrive even earlier—something the U.S. can ill afford in the event of a confrontation with Iran or, especially, a peer-level conflict with the Chinese or the Russians. Getting out of Syria may lessen the chances of the latter happening in the near future, but the threat is in no way eliminated.
Of additional concern is the answer to the question, “who owns the debt?” Much of it is held by the American public; that is, much of it is held by U.S. citizens—around $6.89 trillion. In total, around $15.8 trillion, or 73 percent of total U.S. government debt, is held by private investors, domestic funds, foreign investors, and corporations. An alarmingly large $6.2 trillion of this total is held by foreign investors, with the Chinese making up 19 percent or $1.18 trillion of that total. In the event of a peer-level conflict, the Chinese would have a great deal of leverage over the United States. The threat of flooding the market with its U.S. treasuries—collapsing the price while driving up interest rates—would be a formidable weapon of psychological and financial warfare.
Obviously the American debt problem is enormously problematic, as are the national security implications of running trillion-dollar deficits with a debt-to-GDP ratio over 100 percent before ramping up military spending enormously to deal with a foreign state actor, but it does not have to be the new normal. It is not as though a low debt-to-GDP ratio is ancient history. As recently as 1974, total government debt amounted to only 33.17 percent of GDP. At that time, the U.S. was embroiled in the middle of the Cold War and was experiencing the beginning of the economic malaise that characterized the 1970s. Yet there was still room enough in the budget such that, less than a decade later, President Reagan could blow out the deficit, largely through increases in defense spending, to “bury” the Soviets (to use their own term) and still leave office with a debt-to-GDP ratio of 48.8 percent.
If we can get a handle on runaway government spending and start to bury the enormous debt burden the government has accumulated, then perhaps there is a path to growing the economy out of a debt calamity, putting ourselves in a position to nimbly and effectively respond to the next large-scale foreign conflict. This, of course, must coincide with radical reforms to Medicare and Social Security, the primary drivers of the deficit each year, with a total present value of underfunded future obligations that some estimates put as high as $127 trillion. But, in slashing debt burdens, as in all things, one step at a time.
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