Summary
Highlights
The US national debt, currently at $37 trillion, is a result of government spending exceeding tax revenue. Government spending is divided into mandatory spending (two-thirds of the budget, e.g., Social Security, Medicare) and discretionary spending (e.g., defense, about 14.8% of the total budget). Interest payments on the national debt have become a significant expense, totaling $881 billion in 2024, projected to rise to $1.7 trillion by 2034.
The debt has grown due to the US spending more than it earns, influenced by factors like lower tax rates for the wealthy and massive government spending. An aging population increases Social Security and Medicare outlays, while the growth of the working-age population is slower. Major crises like the 2008 financial collapse and the 2020 pandemic led to massive stimulus packages. Simultaneously, tax rates, particularly for the top earners, have significantly declined, contributing to persistent budget deficits.
The US has consistently run budget deficits, with a few rare surpluses like in the late 1990s under President Clinton. The debt-to-GDP ratio has drastically increased, reaching 124.3% in 2024, a significant rise from 75.8% in 2009. While paying off the debt might seem advisable, economists in the early 2000s predicted catastrophic outcomes if the entire debt were repaid, as it's tied to US Treasury bonds.
Treasury bonds are considered some of the safest investments globally, held by banks, mutual funds, pension funds, and even Social Security. The Federal Reserve is the largest holder of US public debt ($4.5 trillion), using it to manage prices and inflation by controlling the money supply and interest rates. Major foreign holders include Japan, China, and the UK. Paying off the national debt would eliminate these Treasury securities, which are crucial for financial stability worldwide.
Eliminating the debt would free up the $881 billion currently used for interest payments, allowing for investment in public services like education and infrastructure. It could also lower interest rates, stimulating private investment and economic growth. A reduced national debt would decrease inflation, enhance US creditworthiness, and strengthen the dollar, reinforcing investor confidence in the US economy.
Despite the dollar's global dominance, concerns about the growing national debt have led to credit rating downgrades from Fitch Ratings and Moody's, signaling a loss of international investor faith. The dollar's share of global reserves has also steadily decreased. A drop in investor confidence leads to higher interest rates on the debt, creating a vicious cycle that could push the US closer to defaulting.
Paying off the entire debt would require drastic measures: either gutting major federal programs (healthcare, education, defense) or imposing extremely high taxes on the population. Printing vast amounts of money would lead to hyperinflation, rendering the currency worthless. Moreover, eliminating Treasury securities would remove a critical 'safe' investment instrument for financial institutions globally, completely reconfiguring the world economy. The last time the US had zero debt was briefly in 1835, in a vastly different economic landscape.
Economists agree that fully eliminating the debt would be an 'international catastrophe'. The key is to manage the debt, focusing on the debt-to-GDP ratio, rather than total elimination. While the US economy is currently seen as solid, troubling signs like a decrease in US treasury bond purchases during market shocks indicate a potential loss of faith among international investors, foreshadowing a future where the debt could become a severe problem.