$34 Trillion and Climbing
"At this point, $35 trillion in US debt is baked in. Forty trillion, too, may only be a handful of insincere political diatribes away."
By Peter Earle, American Institute For Economic Research
Just before the start of 2024, the US Federal debt surpassed a new milestone: $34 trillion. In 2023 the US added $2.65 trillion in debt, the second largest annual increase in history after the 2020 increase of $4.5 trillion. Going back to 1995, Federal Debt has increased by just over $1 trillion per year, but since 2010 that number has jumped to $1.7 trillion annually.
The surge comes amid mounting warnings from credit rating agencies and a “soft” repudiation of both the US dollar and US government-issued securities.
The time taken to surpass successive $10 trillion milestones has dropped. After crossing the $1 trillion dollar mark for the first time in 1981, the Federal debt didn’t surpass $10 trillion until 2008, 27 years later. It only took nine years to surpass $20 trillion (2017), then a mere five years to eclipse $30 trillion (2022). Now, 22 months after that, the US is almost halfway to the $40 trillion point. (It’s difficult to imagine that the US Federal debt was, well within many of our lifetimes, less than one-third the current market capitalization of Apple, Inc., but that is indeed the case.)
In a year where geopolitical hotspots are on the rise – Russia-Ukraine recently being joined by the Israel-Hamas war which is currently expanding across multiple fronts – of particular note is the ratio of the current US debt pile to annual economic output. At $34 trillion that ratio is 1.2, whereas the debt-to-GDP ratio at the end of World War II was 1.1 in an era of a managed gold standard with few international competitors. If a war footing were suddenly called for, only the colossal monetization of debt (if not the outright printing of money, and vastly higher taxes) would suffice.
The debt assumed over the last two years has additionally been incurred at much higher interest rates. The Fed began hiking rates on March 16, 2022, when the debt level had just surpassed $30 Trillion and the effective rate was 0.08 percent. The last $4 trillion of debt has been taken on at substantially higher rates, with the last $2.5 trillion sold at yields over 3 and 4 percent for 10-year maturities (Treasury bonds) and well over 5 percent at the short end (Treasury bills). The current debt service is in the neighborhood of $1 trillion per year annualized, double what it was less than two years ago and representing between 10 and 20 percent of the 2022 Federal budget.
US Treasury Total Public Debt Outstanding (black) vs. Gross US Federal Debt to GDP Ratio (red), 2000 – present
It is wholly understandable that repeated warnings about the increasing debt incurred by the US government would fall upon increasingly disinterested ears. Consider the following article from October 1981:
The Treasury Department said a series of routine financial transactions during the day pushed the debt total beyond the symbolic trillion-dollar barrier. The debt figure had topped $999.3 billion last Friday, and then held steady for the next four business days as the Treasury’s redemption of old securities nearly matched its issuance of new ones … The 13-digit debt is an inevitable result of tax and spending decisions made by Congress months or years ago. In the past few weeks, as the debt total approached the new benchmark, political figures from President Reagan on down have invoked the trillion-dollar liability as a symbol of government spending run amok. “One trillion dollars of debt,” the president said in his televised address last month. “If we as a nation needed a warning, let that be it”…If the debt keeps increasing at the current rate, it will hit $2 trillion by the end of the 1980s.
In 1981, the debt service was an unthinkable $15 billion per year. In 2023, the average daily increase in the Federal debt was $10.7 billion and from June 2nd to June 5th last year the national debt increased by $358 billion, over 20 times the entire annual debt service in 1981. Of the 248 market days in 2023, the debt increased on 144 of them by an average of $24 billion. On the remaining 104 days, it fell by an average of $8 billion. Three steps forward, one step back.
Since the debt surpassed $1 trillion over 40 years ago, the claim has repeatedly been made that the end is near and that at some point in the near future the entire fiscal edifice would come crashing down spectacularly. But economists are legendarily bad at making predictions, and forecasting apocalypses is a particularly dodgy enterprise for our species. Personally, I am inclined to guess that whatever the end game of skyrocketing government debt is, the US is closer to it than to the beginning, but that too might be wrong. In October 1981 no one would’ve believed that 15-and-a-half thousand days and $33 trillion in debt later there would still be a market for US Treasury securities, or that the dollar would still be the global reserve currency (if increasingly under siege).
Perhaps a better tack to take regarding warnings about borrowing into oblivion is to ignore numerical benchmarks in lieu of expressing the following. First, the US government will never, ever, voluntarily cut spending. When at some point the issuance of Treasury bonds is no longer an option for some reason or another, some combination of the destruction of the dollar’s value and increasingly confiscatory levels of taxation will follow. For our self-preservation, American citizens will need to find a means of arresting the Beltway’s profligate instinct. Second, although only one-quarter of US government debt is currently owned by foreign creditors, the prospect of having our fates controlled by outside powers with interests that diverge vastly (and often in opposition) from ours should be menacing. At the very least, US citizens should consider what they are willing to live without or see others live without. Medicare? The US Coast Guard? Pension backstops? The Food and Drug Administration? Subsidies for just about everything?
At this point, $35 trillion in US debt is baked in. Forty trillion, too, may only be a handful of insincere political diatribes away.
Too much credibility has been squandered on the futile endeavor of predicting fiscal tipping points. Making the consequences of runaway debt clear – unprecedented levels of taxation, a browbeaten dollar, and unwelcome yet unavoidable foreign influence in domestic affairs – is likely a more effective, and more scientifically defensible, warning.
About the Author
Peter C. Earle, Ph.D, is a Senior Research Fellow who joined AIER in 2018. He holds a Ph.D in Economics from l’Universite d’Angers, an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.
Prior to joining AIER, Dr. Earle spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area as well as engaging in extensive consulting within the cryptocurrency and gaming sectors. His research focuses on financial markets, monetary policy, macroeconomic forecasting, and problems in economic measurement. He has been quoted by the Wall Street Journal, the Financial Times, Barron’s, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications.
QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have not been fact checked and are the opinions of their authors. They are either submitted to QTR, reprinted under a Creative Commons license or with the permission of the author. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.
Great piece. Sobering data. We all know it's bad, but seeing it all laid out like that is stark.
My opinion is that this will still be a runaway train of spending until the rest of the world starts to price their economic transactions in something other than dollars. There's no good replacement currency for the dollar out there, but eventually something will give.
Once a credible alternative(s) to the dollar emerges, then it's only a question of how swift the transition to the new suitor(s) is. Businesses engaged in international commerce won't shift to a new currency quickly. But, it will probably be like that old Hemingway quote about how you go bankrupt: "Gradually, then suddenly."
Until the dollar is no longer the world's reserve currency, the politicians will continue to spend. They'll do so even after the transition, but then it won't end well.
If the above has any truth whatsoever to it, we'll look back at two political maneuvers as perhaps the most boneheaded of this century: (1) seizing Russia's US Treasury reserves, effectively telling the world that Treasuries are only money if you're on the US's good side; and (2) as a consequence, forcing Russia to sell its oil in currencies other than the dollar -- a nice test case for ending the petrodollar system.
If you want to give the transition away from the dollar a fighting chance, those are two (really one) effective techniques.
Debt will continue to grow as the Treasury need only print and circulate more fiat currency. Politicians serve short terms and will not be able to help themselves. Gold and precious metals will do well in this environment, and bitcoin even better since there is limit and certain amount in existence.