Homes for Americans could be taken by this issue, endangering national security. The public
debt of the United States is over $34 trillion, and the country’s debt-to-GDP ratio is about 100%. Not exactly the boon that the Founding Fathers had originally intended.
Alarm bells are now starting to sound louder and more frequently.
Jamie Dimon claims that the amount of money Washington is spending is causing a “rebellion”
in the global economy, while Brian Moynihan, the CEO of Bank of America, thinks that action
needs to be taken to address the issue rather than just appreciating it.
The economy is in a “death spiral,” according to Nassim Taleb, the author of Black Swan, while
Jerome Powell, the chairman of the Federal Reserve, believes it’s time for a “adult conversation”
about budgetary responsibility.
Former Speaker of the House Paul Ryan described the problem as the “most predictable crisis
we’ve ever had,” a description that Dimon concurs with. However, it is not now at the top of the
political agenda.
Fixing this debt is not the responsibility of one party over the other—both Republicans and
Democrats have contributed to its accumulation through spending. The presidents who
increased the highest debt, in percentage terms, are Woodrow Wilson (D), Ronald Reagan (R),
and Franklin D. Roosevelt (D).
The public clearly wants action immediately, regardless of whose shoulders it falls on to address
it.
Reducing government debt was ranked as a top concern by 57% of the 5,152 respondents
polled by Pew Research last year, up from 45% the year before.
But do people really need to worry about this issue when, when debt is divided by capita, they
currently have more than $100,000 hanging over their heads? What effects will it have on their
budgets, living expenses, and savings strategies?
One of the main interests of the nonpartisan Peter G. Peterson Foundation, located in New York,
is raising public awareness of fiscal issues, with a particular focus on the growing national debt.
According to the group, debt may result in lower public spending, a decline in the confidence of
foreign investors in the American economy, a narrowing window of prosperity for American
people as the housing and job markets deteriorate, and a threat to national security.
Here’s where JPMorgan CEO Jamie Dimon becomes worried: can the government anticipate
increased output to balance the investment in a weakening economy?
“Instead of focusing on the level of debt, we should be asking: What is the return on the
investment?” Added Professor Veldkamp. “Debt is beneficial if it is issued by the government to fund high-yield projects. If not, future productivity will be low, making it difficult to pay off the
debt.”
In a recent interview, William G. Gale of the Brookings Institute stated that any attempt to
rebalance public debt will “disproportionately” affect the housing, construction, automotive,
and other interest-rate-sensitive industries.
According to the author of Fiscal Therapy: Curing America’s Addiction to Debt and Investing in
the Future, “higher government debt will tend to raise interest rates.”
“The government must find a way to pay for debt it issues, either through taxation or money
creation. Money creation has historically been the (false) remedy when debt gets out of control
since it is simpler to issue money than raise taxes, but the long-term effects are frequently more
destructive.”
Over the next few decades, younger generations who will be climbing the property ladder will
be shocked by any increase in interest rates.
Homeowners and potential buyers have been used to a federal base rate that is effectively less
than 1%, despite the fact that many economists point out that the contentious Fed rate hikes of
the 2020s are simply normalizing the rates of many prior decades.
In addition to their detrimental psychological effects, growing rates are bad news for the already
unaffordable market. The median amount needed to qualify for a house purchase is $105,504,
while the median family income is $99,432 according to the most recent National Realtors’
Association index.
Will America’s national security be impacted by the debt? Admiral Michael Mullen, the
chairman of the US Joint Chiefs of Staff, stated that debt posed the greatest danger to national
security when the country’s debt was only $19 trillion.
In January, former Speaker Ryan stated at the Bipartisan Policy Center that the government will
soon be spending more money on its debt than on Pentagon investments.
“This is about the security of the world,” Dimon continued. Both a stronger America and a
stronger military are necessary. We need it now. Thus, I consider this to be dangerous for all of
us.
Given the amount of debt the government has accrued and the continued health of the
economy (low inflation, stable employment, and reasonably well-off consumers), one could
wonder why lawmakers are unable to continue spending as they see fit.
The government has set a debt ceiling that it is not allowed to spend over; in order to raise or
extend it, Congress must give its approval.
It has occurred 78 times since 1960; but, this summer, negotiations came to a stalemate as
Republicans pressed President Biden’s administration to make significant commitments to
reduce expenditure.
Reaching a settlement could prove more challenging when the matter resurfaces shortly after the 2024 election.
The other problem is that investors can eventually lose interest in purchasing government debt
if they believe the government will not be able to repay it. Joao Gomes, a professor of finance
and senior vice dean of research at the University of Pennsylvania’s Wharton School, has that as
his top priority.
“The most important thing about debt to me that people to keep in mind is you need somebody
to buy it,” Gomes stated. “We used to be able to count on China, Japanese investors, the Fed –
All those players are slowly going away and are actually now selling.”
The countries throughout the world that possess a portion of the money, totaling $7.6 trillion,
are concerned about America’s capacity to pay its debts.
The countries most at risk are the United Kingdom, China ($782 billion), and Japan ($1.1 trillion
as of November 2023). ($321 billion), Canada ($716 billion), and Luxembourg ($371 billion).
“If at some moment these folks that have so far been happy to buy government debt from
major economies decide that ‘You know what, I’m not too sure if this is a good investment
anymore, I’m going to ask for a higher interest rate to be persuaded to hold this’ then we could
have a real accident on our hands,” Gomes said.
“You will have to impose major cuts on some programs the moment the government of any
country realizes that it can no longer sell $1.7 trillion in debt,” he continued. I don’t think
anyone wants to consider the Pandora’s box of societal instability that that unlocks.”
