The U.S. National Debt

It’s hard to think clearly about our government debt problem: the national debt, the annual budget deficit and future entitlement obligations. On the one hand, the debt problem is so unbelievably huge that we can’t even get our mind around a problem so big. On the other hand, it is not something that we “feel” in any sense in our day to day lives, so we don’t really have to think about it. This write-up is an attempt to reconcile those two different impulses.

First, to quantify it: At the time of this writing (10:00 p.m. on September 25, 2010) the national debt is $13.507 trillion dollars according to usdebtclock.org. If you are reading this note tomorrow it will be more. This number is increasing a little over $100 billion per month, which is about the run rate of the annual budget deficit of $1.360 trillion. This debt comes to $43,524 per citizen, so our family of four has a $174k share. This is a bit worse than it sounds, since many families of four could handle an additional $174k debt, but we have to remember that the analogy is imperfect, since this $174 k has to be paid out from our taxes, not from our salaries.

To put it a different way, the government’s annual revenue is $2.132 trillion, so the debt is six times revenue, and the deficit is 60% above revenue. The comparable analogy would be if a family with $100,000 annual income was spending $160,000 annually and was $600,000 in debt. But it’s here that analogies break down. Any family in a situation like that just described would be in great distress and probably bankrupt, but for the U.S. government, it’s not like that at all. Let’s presume that our debt-ridden family could continue to borrow at interest rates averaging around 2%, and had an unlimited line of credit to continue to borrow all it needed to fund its additional spending. Of course that could never happen for a normal family, but that is exactly the situation with the government.

This is the reason that we don’t “feel” the debt problem. It is not hurting us at all, since we can borrow all we need, and interest rates are so low that interest payments are not killing us. Interest payments are 15% of revenues, but no one is giving us any grief about borrowing all we need to cover those payments. Now I realize the debt is hurting us a little in indirect ways: sometimes a worthwhile program doesn’t get funded due to a surge in concern over the deficit, and economists are concerned that government borrowing has a certain crowding out affect that may restrict some private borrowing. However, for the most part, the economy continues just fine and we don’t really feel the debt.

The problem is that this process cannot continue indefinitely. It is a mathematical certainty. Eventually, we would soak up all the savings in the world and there would be nothing left to borrow. Or if interest rates increase, our interest payments will exceed our ability to borrow to cover them. Of course, it will never get quite that far. More likely is something akin to what happened to Greece this spring, when their interest rates rose to 20% suddenly, they had bills come due, and they couldn’t pay, so they got bailed out. We will not get bailed out because we are too big and no one can do it. Suddenly, we will have to live within our means, and when that happens, the pain will be almost unimaginable. All government programs would need to be cut about in half, including the entitlements like social security. It’s possible that this will occur along with inflation (though I don’t see inflation on the horizon yet), but the effect will be the same; inflation will just warp the way money gets distributed, with some people hurt more and others less.

Some folks have written that our debt situation is even worse, because they look at U.S. government commitments to make payments on programs in the future. For example, in 2030 Medicare will cost a bunch more money. I have chosen not to factor that into this analysis. If the government can’t pay somebody a promised benefit in 2030, it just won’t. They’ll change the law so that they don’t have to.

One final note – I believe the crunch will hit Japan before it hits the U.S. Their debt situation is worse than ours. They have been able to get away with it for a long time because they initially had a high national savings rate and they were able to export into a booming global economy. Neither of those factors is really in play any more, their debt is worse than ours, and their demographics are worse too. Japan will also be too big to bail out. There are other European nations that may be up to bat before Japan in the national debt baseball game, but I doubt the game will go on for too terribly much longer – it won’t be years and years.