As of this writing, according to US Debt Clock (usdebtclock.org) the US National Debt has ballooned to $34 Trillion dollars, equal to 122% of the Gross Domestic Product (“GDP”) of the United States. Sometimes, when discussing these types of numbers, it is difficult to put them into perspective. They seem astronomical, like discussing the mass of the sun or the distance to the nearest star. To help us wrap our minds around those numbers, consider the per citizen debt. The National Debt, excluding unfunded liabilities like Medicare and Social Security, equals about $103,845 per U.S. citizen, a sizable sum when put into the perspective of our own finances. Of course, the real question is, “Does the growing US Debt even matter?”
Over the last two decades, economists have proposed a new economic theory, dubbed Modern Monetary Theory, which states that federal deficits do not matter when a country issues its own currency. Modern Monetary Theory’s basic argument states that a sovereign country with its own currency can simply issue more currency to fund deficits and pay debts and is therefore not constrained by tax revenues. This theory gained more traction when the U.S. Government flooded the market with new dollars during the 2008 Financial Crisis and the 2020 Covid Crisis with little monetary impact. Advocates also point to Japan, which has continued to fund deficit spending until its national debt reached 268% of GDP in 2024. As of yet, advocates point out, there is no currency crisis in Japan despite this massive debt.
Yet, it is hard to ignore that those advocating for Modern Monetary Theory have an incentive to believe it is true since it allows infinite government spending. Could they be using this economic theory to justify their spending? Likewise, politicians like Modern Monetary Theory since it allows them to shower constituents with lavish social programs without having to raise taxes. Neither Republicans nor Democrats want to bring the bad news of the US debt to the American people. Thus, the national debt has soared from $5.5 Trillion, about 52% of GDP, to $34 Trillion today.
It is also hard to ignore history’s currency crises, from Mexico to Venezuela to Thailand to Germany’s Weimar republic, when a country’s debt becomes unsustainable inflation spikes, interest rates skyrocket and the economy craters. It seems naïve to believe, despite all of its advantages that the US is immune from these risks. Economist and bond investor Jeffrey Gundlach likens Modern Monetary Theory to jumping off a 100-story building, and then gleefully noting after falling 50 stories that, “things are going pretty well so far”. What he means by that story is that deficits do not matter until they do, and when you have reached the bottom, things get very bad.
Which brings us back to the situation in the United States. Unfortunately, the U.S. appears to be on a fiscally unsustainable path. Is the end near? I do not think so. We may have a long way to go before markets care about the Federal Debt, but a day of reckoning will come. It is important that policymakers reduce spending before it is too late.
Further, the reality of all debt is that allows spending now in exchange for lower spending in the future. In this regard, we as Americans are literally mortgaging our children’s future, resulting in the very real potential that future generations will be worse off because of our spending. Chris Brighton and Alex Pickard of Research Affiliates have written an excellent article on the national debt as a “Stealth Tax on Prosperity”. You can read more about their perspective here: https://www.researchaffiliates.com/publications/articles/1035-stealth-tax-on-prosperity?evar36=eml_stealth-tax-letter&_cldee=QtPSyAPDSJjbLGfywoihOitSWjmXwIxAiydOctUsstLrZGaYhx84b6027HCqQVj4kDFtnTzFNp9mP1VhmI1UCA&recipientid=contact-63f00766de3fe71180ce005056bc1247-5c996417ebf542bfbad048dcd5f051be&esid=fe4f0996-6423-ef11-840b-6045bdeda74e
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