Level of US Government Debt

This post is about the level of US federal debt, but the level of debt globally is not restricted to the US. In addition to the US these countries all have a Debt to Gross Domestic Product (GDP) ratio over 100%: Japan, Singapore, Italy, France, Spain, and Canada among many other countries. What is astonishing about the level of US debt though is how quickly the level of debt rose, and the US went from being one of the most fiscally responsible governments to being dependent on debt to close its budget gaps. The following URL (https://fred.stlouisfed.org/series/GFDGDPA188S) brings up a graph that shows Gross Federal Debt as Percent of GDP. To put this in perspective, the US has a higher level of debt today relative to the size of its economy, than it did at the height of World War II (WW II).

During WW II debt to GDP peaked at about 120%, and when the war ended it trended down to about 30% in 1980. Starting in 1980 regardless of which party controlled the branches of the federal government, this ratio rose to over 120% in 2020. Governments rely on debt to close budget gaps, and the level of debt today reflects an inability of either party to exercise fiscal discipline. President Clinton’s administration, 1992 to 2000, was the only US administration that effectively reduced government debt. The root cause of this reliance on debt is largely attributed to transfer payments for budget items like Medicare, Medicaid, and Social Security but the polarized atmosphere of US politics is making it impossible for the parties to work together to exercise fiscal discipline. Moreover, we are again waiting to see if the federal government will shut down and the political parties seem incapable of coming to agreement over spending.

As a reserve currency (a reserve currency is held by central banks to facilitate trade so there is a consistent demand for US dollars) the US is able to carry a higher level of debt then what would be permissible if it were not a reserve currency. However, there can still be consequences, including rising interest rates if investors lose confidence in US government debt and deteriorating conditions for economic growth.

Investors should take notice of the level of government debt and demand accountability to bring spending and taxation back into balance. There are too many examples of countries having a fiscal crisis because of unsustainable debt levels, and while it is unlikely that the US dollar will be replaced as a reserve currency it is also not out of the realm of possibilities.