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From Q1 2023 to Q1 2024 our federal debt grew by slightly more than $3 trillion. This tracks with my predictions made in this essay penned in 2018. This increase parallels the increase from Q1 2020 to Q2 2020 when government spending rose dramatically to combat an airborne virus. In 2020 and 2021 we experienced “helicopter” money or direct payments to consumers. What accounts for a similar debt increase in the last year? Even though total spending decreased from 2020, our debt is feeling the impact of greater interest costs. 

How should federal debt compare to the overall economy? There was scholarly research on this topic suggesting that once debt grew to more than 90 percent of the overall economy, additional debt was counterproductive. The U.S. crossed the 90% threshold in 2010. Debt as a percentage of GDP sits at 123%.

The government is unlikely to curtail spending and the debt will continue to grow regardless of who gets elected president or which party controls Congress. About 50% of the budget is allocated to Social Security, Medicare, and Interest. Much of the budget’s remainder is similarly inflexible. 

When interest rates were lower, I proposed an academic exercise in Escaping Oz: Navigating the Crisis where I determined a FICO score for the US government. This is the creditworthiness score assigned to consumers. I concluded the U.S. government was a sub-prime borrower (and this was nine years ago). While my exercise was hypothetical, there is a concrete measure of how the market views US creditworthiness through something called a Credit Default Swap (CDS). Consider the CDS a form of debt insurance. There are 13 nations whose debt insurance cost is less than the United States including Japan, which has a significantly higher debt to GDP ratio. US debt insurance cost is roughly on par with Portugal. Let that sink in.

I’ve argued for many years that there is no friction preventing higher spending on government’s part. There is no incentive to balance the budget or cut spending. Why? There are plenty of buyers for US debt. This is why Congress – both parties – can appropriate funds for a war in eastern Europe. This is also why there are so many lobbyists in D.C. It is also the reason for voter frustration (both parties) about how we should spend more to take care of domestic matters.

What friction might emerge to give Congress pause about spending? The ultimate fate of the US Dollar. 

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