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Why the U.S. Won’t Pay Down Its Debt: A Comprehensive Analysis

RichDadph Market Watch (Bearish Outlook) (3)

The U.S. national debt has reached a staggering $33 trillion as of September 2023, sparking debates about its long-term sustainability. While some argue that the debt is a ticking time bomb, others contend that it serves as a necessary financial instrument for the government. This article delves into the complexities surrounding the U.S. national debt, examining its role in the economy, the risks it poses, and the political challenges in managing it.

5 Key Takeaways

  1. National Debt as an Accounting Record: The national debt essentially tracks the dollars the government has injected into the economy minus those it has taken out, mainly through taxation.
  2. Role of Treasury Bonds: The majority of the U.S. debt is held in the form of Treasury bonds, which are considered safe and secure assets, attracting both domestic and international investors.
  3. Debt-to-GDP Ratio: A critical metric for assessing the sustainability of national debt, the U.S. is nearing a 100% debt-to-GDP ratio, which is considered a red flag by many economists.
  4. Interest Rates and Debt Servicing: The Federal Reserve’s actions on interest rates directly impact the cost of servicing the national debt, which was nearly 2% of GDP in 2022.
  5. Political Inaction: Despite having the resources to manage the debt, political challenges have prevented the U.S. from taking decisive action.

The Accounting Perspective

Contrary to popular belief, the national debt is not a liability but an accounting record. It keeps track of the dollars the government has added to or subtracted from the economy. While some argue that zero debt is ideal, economists point out that debt serves useful purposes, especially during emergencies. For instance, the national debt increased by nearly 90% since the onset of the pandemic.

Treasury Bonds: The Safe Haven

Treasury bonds, notes, and bills are the primary instruments through which the government borrows money. These securities are considered extremely safe, making them attractive to investors. The U.S. dollar’s status as the world’s reserve currency further amplifies this demand. However, the continuous borrowing for immediate consumption rather than long-term investments is a concern.

The Debt-to-GDP Conundrum

The debt-to-GDP ratio is a crucial indicator of an economy’s ability to service its debt. While a ratio around 70% is considered stable, the U.S. is approaching a 100% ratio. This raises questions about the country’s ability to manage its debt, especially when interest rates are on the rise.

The Interest Rate Dilemma

The Federal Reserve has been increasing interest rates to slow down economic activity, which in turn raises the cost of servicing the national debt. In 2022, the federal government paid $475 billion in interest, nearly 2% of GDP. This scenario benefits bondholders but puts additional financial strain on the government.

Political Roadblocks

The U.S. has the resources to manage its debt, but political challenges have hindered progress. The debt ceiling debates and the lack of a concrete plan to tackle the rising debt-to-GDP ratio have led to a downgrade in the U.S. credit rating. This political inaction is a significant obstacle in effectively managing the national debt.

Lessons Learned

  1. Debt is Not Inherently Bad: Debt can be a useful tool for economic development if managed wisely.
  2. Importance of Political Will: The lack of political consensus is a significant barrier to debt management.
  3. Global Implications: The U.S. debt has global ramifications, given the dollar’s status as the world’s reserve currency.
  4. Interest Rate Sensitivity: The cost of debt servicing is highly sensitive to interest rate changes, requiring careful monetary policy decisions.
  5. Balancing Act: A nuanced approach that considers both the costs and benefits of debt is essential for long-term sustainability.

Final Thoughts

The U.S. national debt is a complex issue that cannot be viewed through a singular lens. While it serves as a useful financial instrument, its mismanagement can lead to economic instability. The key lies in striking a balance between leveraging debt for economic growth and ensuring its long-term sustainability. Political will is crucial in this regard, and the time for action is now.

Source: Why The U.S. Won’t Pay Down Its Debt – CNBC

Note: This article is based on the video “Why The U.S. Won’t Pay Down Its Debt” produced by CNBC. The video was published on September 10, 2023, and has garnered 260,951 views, 4,212 likes, and 1,103 comments as of the time of this writing.

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