Time to worry about U.S. debt?

The excessive angst about American debt today might not really warranted because the economy is less levered today than it was a decade ago. Maybe debt is fine after all? Or is this propaganda from the government and their aligned controlled media outlets?

At this point, there are a number of factors, cyclical as well as secular, that are exerting downward pressure on interest rates at present, and these factors are not likely to reverse anytime soon.

There are two important factors related to the economy that have changed over the past four years. Clearly, nobody at that time foresaw the COVID-19 pandemic that ravaged the global economy. Inflation would soar in 2021 and 2022 to the highest rates in decades due, at least in part, to the government out-of-control spending and disruptions in supply chains that the pandemic caused. Consequently, the Federal Reserve tightened monetary policy significantly. They are considerably higher today than they were in the summer of 2019. The top end of the federal funds rate stood at 2.50% in July 2019, and the yield on the benchmark 10-year Treasury note was roughly 2% at that time. Today, those rates are 5.50% and about 4%, respectively.

Secondly, debt in the American economy has risen further over the past four years. Total debt outstanding has grown from $69 trillion in Q2-2019 to more than $92 trillion at present, an increase of more than 30% in only four years. Although the federal government has led the way with its $10.5 trillion rise in debt, every sector has registered an increase in borrowing over the past four years. Household debt is up $3.9 trillion, non-financial corporate debt has grown by $4.7 trillion and the debt obligations of state and local governments have edged up by $169 billion. Financial sector debt has grown by $4.2 trillion over the past four years.

The sharp rise in total U.S. debt over the past four decades may seem disconcerting, but any variable that grows at a constant rate over time will display an exponential pattern. Although debt has mushroomed over the past 40 years, so too has the size of the U.S. economy. Specifically, nominal GDP in the United States has grown from less than $3 trillion in 1980 to nearly $28 trillion today. Larger economies should be able to sustain higher amounts of debt, everything else equal.

The U.S. economy might be in better shape than expected and even had a GDP growth of 3.3% in Q4 2023. As the economy is picking up post the pandemic, with the unemployment rate is still low, the Fed will likely cut interest rates in mid-2024, which could help the economy to grow even more. At the same time, there is an underlying frightening American mentality to consume and spend more money than you have, to use credit cards to finance an extravagant lifestyle you really can’t afford. This goes for individuals, for households and for the government. Especially under the Sanders-Biden government where spending money you don’t have and grow the government seems to be trademark policies.

Overall, debt is not healthy for a country, for a person or for a company as it makes life more expensive, more stressful and it gives a delusional view of reality. You might even think you are rich, but it might all be borrowed money. To life a simple life with the money you have, that is to live life at your fullest. To be debt free is like breathing fresh air. There might be other messages in media, but it is all propaganda and brainwashing and attempts to make you spend more and more and increase the debt. The ads state that more loans and more credit cards are good for your credit score. Keep spending, keep consuming. The American dream is clearly in decline, but there is nobody in Washington DC who seems interested in paying off the mountain of federal debt and set up a balanced budget. The credit card mentality is truly a sad part of the American soul and society.