Three related terms are very much in the news today: the federal deficit, the federal debt and the debt limit. The deficit, or the annual amount of new debt the government incurs, has reached all-time highs, as has the federal debt (the cumulative debt of all the years) at $31 trillion and counting. The debt limit, or the amount of money the federal government can “borrow” has become a political leverage point, with the specter of a government shutdown and its payments halting at stake.
It is difficult to know where to “go back” to better understand all this since, alas, government debt has always been with us. As is typical with wars, the Revolutionary War left the federal government in arrears, in this case by some $75 million. James Madison in his debates with Alexander Hamilton in the 1790s noted that war is the “true nurse” of the growth of federal government debt and the unchecked expansion of presidential power. Thomas Jefferson argued that national debt was “the greatest of dangers” to threaten the American experiment in self-government. And there are several pearls of financial wisdom from Benjamin Franklin including “A penny saved is a penny earned.”
Nevertheless, the debt continued to grow until President Andrew Jackson saw it zeroed out for the first and only time in 1835. Let’s all start wearing “Old Hickory” t-shirts! However, Jackson not only stopped all the federal spending he could, but he also sold off western lands to pay off the debt, and his success only lasted a year. The Civil War saw a massive increase in the debt (growing by 4000%), as did later wars. In fact, a study of the debt would show that historically wars tended to not only grow the federal debt but also established a new normal from which the debt grew further.
We would go back to the 1980s to see the modern version of the problem, namely that even without a major war, a combination of slow economic growth, reduced taxes and high federal spending would grow the debt dramatically. In 1981, the national debt reached the $1 trillion level. With the war on terror, Covid, and especially growing entitlements such as social security, Medicare and Obamacare, the debt has more than doubled in just the last decade.
So, who cares? Politicians often promise to reduce the debt but see it grow instead. Republicans and Democrats alike have added to it. Joe Q. Public more or less shrugs his shoulders, feeling it doesn’t affect him directly.
But here is the looming question: Is there a point at which the federal debt bubble actually bursts? Again, we can go back into history, especially recent history, to see that a number of things seemed to be swimming along nicely until they weren’t. The roaring twenties burst and left in its wake a Great Depression. In 2008, the housing bubble burst, fueling the Great Recession. On a smaller scale, we have seen the cryptocurrency bubble burst and, more recently, the technology banking bubble.
Might the federal debt bubble burst? Of course, it could. Even the experts don’t know how much federal debt is sustainable until suddenly it isn’t. Other countries, including the increasingly challenging China (with over $1 trillion in US debt), own large chunks of our debt. What if they lose confidence in our growing debt-based economy and disinvest or even use it as leverage against us? What if our own people, shaken over other economic developments, begin to move away from investing in U.S. government debt instruments? When does the debt simply become too much? Whatever that point is, we seem to be hurtling toward it without much care or concern.
The answer is to take out an insurance policy against this sort of catastrophe and begin to work the debt back down to manageable levels. We could start, as President Biden seeks to do, to put Medicare and Social Security on a more sustainable path. We could continue, as Republicans wish to do, by cutting back federal spending. Even if the chances of a debt bubble bursting are small, the consequences would be disastrous. That’s precisely when an insurance policy is the way to go.
David Davenport & Gordon Lloyd
March 18, 2023
The way I hear it reported, Republicans are just as interested in putting Social Security on a sustainable path. Biden maybe does too, although his management of fiscal policy casts doubt on his ability.Loading…