When Does Our National Debt Create A Financial Crisis?

This is the question I’ve been asking for 40 years. I became preoccupied with the national debt in the 1980s when Ronald Reagan was president. I was a big Reagan supporter until he began running annual budget deficits, which swelled the national debt above $2 trillion by the time he left office. Now our national debt is more than 14 times that large as you can see below.

In Forecasts & Trends on Tuesday, I wrote about President Biden’s first federal budget proposal announced last Friday in which he asked Congress for just over $6 trillion in spending for fiscal year 2022, which begins on October 1. And the federal budget gets larger every year thereafter.

The president’s 10-year budget proposal shows federal budget deficits averaging $1.3 trillion a year or more for the next decade. That’s $13 trillion or more added to our debt over the next decade, ballooning it to $41 trillion or more. That’s an increase of 46% in just 10 years!

Would that finally be enough debt to tank the bond market and throw us into a financial crisis?

Or think about it another way: Our national debt will have exploded from just under $5 trillion in 2000 to over $41 trillion in less than 30 years. This has never happened before in dollar terms or in percentage terms. No one knows if the bond market can handle it, or if it will finally crash.

Now you might be thinking: Hold on there, Gary. Barack Obama more than doubled the national debt during his eight years as president, and the bond market didn’t tank. Plus, the economy recovered somewhat under Obama. And that would be true.

But think in terms of how adding over $35 trillion in debt in such a relatively short period of time could impact the US dollar. The dollar is the world’s reserve currency mainly because markets, financial institutions, and investors all over the world believe if they invest in our debt, they will be repaid in full plus interest.

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