Is The Growing U.S. Debt Sustainable? Not Indefinitely, But Don't Ring The Alarm Just Yet

There is an increasing unease regarding the sustainability of rising debt levels globally, but particularly for the U.S. To be clear, such concerns are not new and typically intensify around recessions as government borrowing ramps up to offset the dearth in private sector demand. We could debate whether higher debt levels can be sustained indefinitely. But, let’s start with describing the three broad categories of debt in the economy:

Three types of debt

  1. Corporate debt – As the name suggests, this is debt incurred by businesses, and is typically used by corporations to support general business operations and investment activities.
  2. Household debt – Mortgage debt represents the largest share of household debt, but this category also includes credit card and student debt, among other types.
  3. Government debt – Also referred to as public or sovereign debt, this is the obligation of the federal government. The primary source of revenue for the government is tax. When tax revenue falls short of covering expenses, debt is incurred to finance total spending.

Figure 1 provides the historical evolution of all three types of U.S. debt measured against gross domestic product (GDP) starting in the 1950's. Some observations worth noting:

  1. Irrespective of the type, debt is not constant and will ebb and flow over time based on prevailing financial market and economic conditions.
  2. Household finances have improved remarkably since the Global Financial Crisis (GFC) of 2008-2009. The household debt-to-GDP ratio has declined from the pre-GFC peak of nearly 100%, to 75%. While the rise in the rate of unemployment in the U.S. is the current concern, household finances are as good as they have been in almost 20 years, and are buttressed with low interest and below-average debt service costs.
  3. Compared to households and the government, corporate debt represents the smallest share when measured against GDP. The broader concern, however, is that corporate debt is at a historical high. Even though the COVID-19 crisis has stressed corporate balance sheets, by way of the U.S. Federal Reserve (the Fed)’s massive support of corporate bonds, credit risk is now partially shared by the federal government, which has had a pacifying effect on credit markets.
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