This article is intended to provide perspective on how government policy outcomes may impact financial markets and investments. These insights are not political statements from Ameriprise Financial, nor an endorsement of a particular candidate or political party.
Is the U.S. national debt really a problem? The total has recently passed $35 trillion — over 120% of the country's gross domestic product — and is rising quickly. And of that total, almost $20 trillion was added in the last 15 years.1
But big numbers don't necessarily pose a problem for investors, in our view.
Here are 8 reasons why:
1. Large deficits typically result from recessions and crises
In most years and across most administrations, the U.S. government has spent more than it’s received in taxes, resulting in deficits. These deficits tend to be significantly larger in the aftermath of recessions and crises, when tax receipts decline, and the government spends to stabilize the economy.
The 2008 Global Financial Crisis and the 2020 pandemic resulted in unusually large deficits, which subsequently declined as the crises eased.2 It could be argued that the ability of the U.S. government to borrow money and support its citizens during crises prevented economic downturns from becoming even more severe and long-lasting.
2. Concern about national debt may depend on the metric used
The more than $35 trillion current U.S. debt is greater than the $27 trillion U.S. nominal gross domestic product (GDP).3 Is GDP, the total value produced each year, the right metric for assessing the sustainability of U.S. debt? The U.S. is a very wealthy country. For example, the total U.S. household net worth is over $150 trillion, which is close to five times the size of the nation’s debt.3 From that lens, the debt level may not seem as troubling. It may be one reason to explain why the nation is generally viewed by markets as a good creditor.
3. The U.S. is a good credit risk
With $35 trillion in liabilities and $200+ trillion in assets, the U.S. federal government has far more assets than many realize.4 Rather than measuring debt as a percentage of GDP, which is primarily an income measure, measuring debt against total assets paints a far more solvent picture. If all the U.S. government land, buildings and natural resources were combined, the country would likely have more than $200 trillion in assets. While not all are liquid, they certainly illustrate that the U.S. is a much better creditor than many would believe.
4. U.S. debt has a captive audience
Given that Treasuries are one of the least risky and most liquid assets in the world, it’s unlikely investors will lose their appetite for U.S. debt. The federal government owns 20% of U.S. debt, making it the largest single holder.5 Since this debt is money the government owes itself, however, it has no effect on overall government finances. More than 40% of U.S. debt is owned by U.S. savers, pensions, mutual funds and financial institutions, who hold Treasuries for its relatively lower risk, yield, policy requirements or regulatory reasons.5 While it’s true that more than 20% of U.S. debt is held abroad, it’s not heavily concentrated in one country. The largest foreign investors include Japan and the U.K., where yields are historically lower than in the U.S.5
5. China’s U.S. debt exposure has declined without incident
China is the second largest foreign owner of U.S. debt, but should this concern investors considering geopolitical tension? Probably not. There’s a notion that China could weaponize U.S. debt by rapidly selling its U.S. Treasury holdings, causing financial instability and a spike in borrowing costs. We believe this risk seems unfounded, as China has been reducing its position in Treasuries for years without disruption to the U.S. debt market.6
6. Higher interest rates are only a problem if economic growth lags
The U.S. issues debt for a variety of reasons, and theoretically, borrowed funds are put to productive use by the government. Interest expense (%) is the cost of this borrowing, and conceptually, U.S. GDP growth (%) represents the government’s “rate of return.” As long as the rate of return (economic growth) is greater than the borrowing cost (interest expense), the U.S. can pay down its outstanding debt. Currently, growth is higher than interest expense.7
7. The demographic concern — baby boomers turning 65 — ends soon
Aging baby boomers, one of the largest demographics in the US, were expected to put a financial strain on the country through increased medical costs. This risk hasn’t materialized. Even though a large portion of boomers have reached retirement age, Medicare spending has been much lower than anticipated.8
8. Social Security isn’t going bankrupt
It’s true that the Social Security trust fund is expected to be depleted in 10 years.9 That’s not bankruptcy, however. Once the trust fund is depleted, Social Security will pay out based on what’s collected in tax revenue. The interest from the trust fund would no longer be available to pay benefits. Given payouts would then be based solely on tax revenue, it’s possible that retirees could potentially be paid less than their full benefits. The nation’s politicians, however, could always adjust the program (for example, raise the retirement age and increase the taxable maximum, to name a few) to prevent retirees from receiving less than what they’d expected.
Bottom line
It’s natural to be concerned about the growing size of the U.S. national deficit and how it may impact the economy and markets, but the financial picture is far from dire, in our view. Instead, investors may be better served by focusing on what they can control: their long-term investment strategy. Reach out to your Ameriprise financial advisor if you’d like to discuss your strategy or if you have questions about how government benefits, like Social Security, may fit into your broader retirement income plan.