US national debt tops $30 trillion for first time
By Matt Egan, CNN Business
The US national debt just passed another sobering milestone.
Total government debt outstanding is now over $30 trillion, according to Treasury Department data released on Tuesday.
Government borrowing accelerated during the Covid-19 pandemic as Washington spent aggressively to cushion the economic blow of the crisis. The national debt has increased by around $7 trillion since the end of 2019.
It is impossible to know how much the debt is too high, and economists remain divided on the true extent of the problem. But the latest debt milestone comes at a tricky time as borrowing costs are expected to rise.
After many years of rock bottom interest rates, the Federal Reserve is shifting into inflation-fighting mode. The Fed plans to launch its first round of rate hikes since 2015. Rising borrowing costs will only make it harder to finance this mountain of debt.
“It doesn’t mean a crisis in the short term, but it does mean we’re going to be poorer in the long term,” said David Kelly, chief global strategist at JPMorgan Asset Management.
Interest costs alone are expected to top $5 trillion over the next 10 years and will account for nearly half of all federal revenue by 2051, according to the Peter G. Peterson Foundation, an organization focused on raising awareness of the tax challenge.
Kelly pointed out that rising borrowing costs will limit the amount of money Washington can spend on other priorities like climate change.
The federal government now owes nearly $8 trillion to foreign and international investors, led by Japan and China. Eventually, this will have to be repaid, with interest.
“That means American taxpayers will pay for the retirement of the people of China and Japan, who are our creditors,” Kelly said.
The $30 trillion national debt figure is somewhat inflated by the fact that some of the money is owed by the government to itself. This is debt held in Social Security and other government trust funds. So-called intra-governmental assets total more than $6 trillion.
Yet the national debt has skyrocketed in recent decades, partly due to the 2008 financial crisis and then the pandemic.
Total debt outstanding stood at $9.2 trillion in December 2007, just at the start of the Great Recession, according to Treasury data.
By the time former President Donald Trump took office, the national debt stood at nearly $20 trillion.
“Covid has exacerbated the problem. We had an emergency that required spending trillions,” said Michael Peterson, CEO of the Peterson Foundation. “But the structural problems that we face fiscally existed long before the pandemic.
Peterson said the main drivers of the “dangerous fiscal situation” remain an aging population and high healthcare costs. He blamed Republicans and Democrats for adding to the national debt.
“Our current fiscal situation is the result of many years of fiscal irresponsibility by both parties. What is needed to get us out of this predicament is the honesty and leadership of our elected officials,” Peterson said.
Yet there has been virtually no progress in Washington on addressing the national debt, and the two sides remain deeply divided on many issues.
“The polarization of our government, and to some extent our population, makes implementing solutions more difficult,” Peterson said. “If we don’t get our finances in order, all of these other concerns like climate, inequality and national security will become more difficult.”
About two-thirds (67%) of Americans in a CNN poll in December said government spending is a major problem for the national economy, below rising costs for food and everyday items ( 80% said it was a major problem) and about even with the pandemic (65% said Covid is a major problem).
There is a wide partisan divide on this issue, with 90% of Republicans calling government spending a major problem, compared to 70% of independents and 44% of Democrats.
In 2020, total public debt as a percentage of gross domestic product (GDP) exceeded 100%, years ahead of schedule. For context, Japan’s debt-to-GDP ratio is well over 200%.
“Addicted to public debt”
Federal Reserve Chairman Jerome Powell recently acknowledged that the fiscal situation could not continue on the current path.
“We are on an unsustainable path,” Powell told lawmakers last month. “The debt is not at an unsustainable level, but the trajectory is unsustainable, which means it is growing faster than the economy, significantly faster than the economy. We have to sort that out over time. We will address this over time. And the best way to do that is soon.
But it won’t be easy – or politically popular. And that will be complicated by the Fed’s planned interest rate hikes.
Even as the national debt continues to climb to new heights, federal government interest payments as a percentage of GDP are lower today than in the past. And that gives confidence to many economists that this is not an immediate crisis.
In 2021, interest as a percentage of GDP was 1.5%, down from 3% in the early and mid-1990s, according to the St. Louis Federal Reserve Bank.
“I don’t see a near-term meltdown here,” JPMorgan strategist Kelly said.
But he said it still made sense to reduce the national debt – gradually.
“You don’t want to do it too quickly. It is an economy that is dependent on public debt,” Kelly said. “But the danger is that it keeps growing until it eventually causes a huge problem.”
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