Dem
51
Ties
1
GOP
48
This week, the U.S. passed an inauspicious milestone, as the national debt is now north of $40 trillion.
As a practical matter, $40 trillion is not especially different from $39.9 trillion, or $39.8 trillion or even $39.0 trillion. However, thanks to round number bias, people pay much more attention to 40 or 30 or 20 than they do to 39.9 or 39.8 or 39. So, the fact that the United States has passed this threshold is getting a lot of attention right now.
Macroeconomics is not exactly our cup of tea, so we need to tread lightly here. We do know more about the subject than Donald Trump does, but that only puts is in the rare company of 95% of the American populace. We thought we would present our thoughts through three lenses: long-term, medium-term and short-term.
Long-term, this is not sustainable, and eventually the Congress is going to have to balance the books a little better. Maybe a lot better. And that means either cutting spending, or increasing taxes, or, most probably, both of those things. Now, please note that we have no strong sense if the time for action has finally arrived. Every time the debt crosses some major threshold (for example, a few years back, when it officially grew larger than one year of U.S. GDP), there is much anxiety and tearing out of hair, and then... nothing much changes. Also, we have read many pieces over the last decade arguing "The debt is a MASSIVE problem and the U.S. economy is in imminent danger of a nuclear meltdown." And we have ready many pieces arguing "The debt may be big, but it's not actually a big problem, for [X] reason." The point here is that while we are not really sure if the U.S. is on the verge of a crisis, nobody else is really sure, either.
That said, there are some particularly worrying signs right now. First, treasury yields are currently quite high. That means it's more expensive for the government to borrow money, and has the potential to set up an inflationary or hyperinflationary cycle where the more borrowing --> debt service costs more --> more borrowing --> debt service costs more and so forth. Secretary of the Treasury Scott Bessent tried to get yields down earlier this week by announcing a plan to buy back a higher-than-normal number of government securities, but it didn't work. Yields trended downward for a day, and then started creeping upward again.
Second, if we may be blunt, the people steering the ship of state right now are largely a collection of incompetents, buffoons and bootlickers. This is probably the least capable collection of people ever to lead the United States. Tackling the national debt is a project that much more capable administrations, both Democratic and Republican, have tried to grapple with, and have mostly failed. The last president to make real headway was Bill Clinton, and that was in substantial part because of the dot-com boom. It's possible a more competent president might be able to ride the AI boom in the same way, but... probably not. The dot-coms were popular until they went bust, and so voters were happy to see the government encourage them. The AI companies are not.
Third, lots of other countries are having the same problem and are, if we may use a 1960s term, freaking out. The fact that Britain keeps going through prime ministers more quickly than through heads of lettuce is due, in part, to the various prime ministers' inability to stabilize that nation's balance sheet. Similarly, the Japanese economy is in turmoil right now, and is experiencing its worst inflation in decades. In fact, the U.S. just bought up a bunch of Japanese yen in an effort to try to convince the Japanese government not to unload a bunch of U.S. treasuries that it holds. If the Empire of the Sun did that, it would make it even harder for the U.S. to find buyers for its bonds, and the federal government would have to pay even higher interest rates.
Fourth, and something of a combination of #2 and #3, the U.S. has become an unreliable partner on virtually every level. It is possible that many other nations will begin to take steps to move away from the dollar as the world's reserve currency, and from U.S. treasuries as (one of) the world's reserve repositories of value. If that happened, it would further compound the U.S. government's issues in trying to right the economic ship.
That brings us to the medium-term implications—say, the next couple of years or so. It is (sometimes) very popular to campaign on budget austerity, but it's pretty much never popular to actually follow through. The problem is a basic one, namely that every voter who wants the budget cut wants the cuts to come from someone else's money. Social Security recipients might like to see the military budget cut. Military hawks think Medicaid is not worth the money, and so forth. It's easy to carp about things like school lunch programs, and sometimes those things even get cut, but those are tiny parts of the federal budget. If there's going to be any serious reductions in outlays, they will either have to come from military spending (around 20% of the total budget) or entitlement spending (around 60%).
We suppose it is possible that if there is a divided government from 2027-29, something might get done because no one party will take the blame for unpopular spending cuts. But we seriously doubt it. The Congress is pretty dysfunctional right now, regardless of which party is in the majority, while the White House is entirely dysfunctional. Further, as you may have heard, there is one party that really hates cutting defense spending and one party that really hates cutting entitlement spending.
Even if something is done (whether substantial, or moderate, or trivial) in the next couple of years, there is zero chance it will be done prior to some sort of serious crisis. Pretty much always, Americans have to get bitten hard in their rear ends before Congress gets off their rear ends. And that's the real medium-term implication here: Whether or not Congress does anything, there is a fairly substantial chance that the already shaky U.S. economy goes into recession in 2027 or 2028. Should that come to pass, well... if you thought American voters were in a "throw the bums out" mode already, you ain't seen nothin' yet. 2028 could be an absolute bloodbath.
And finally, the short-term implications. It is not impossible that this becomes a campaign issue in 2026, particularly with the $40 trillion threshold having been crossed reasonably close to Election Day. If it does become a campaign issue, then the party that will be hurt is the Republicans. First, because they are the ones in power right now. Second, because the Trump administration has been quite the spendthrift with the people's money. We're less than 2 years into Trump v2.0, and yet he's overseen about $12 trillion of that $40 trillion in accumulated debt, or close to a third. That's a somewhat unfair framing, because it hits more-recent-serving and longer-serving presidents the hardest. Still, it is a fact that could fit nicely on a bumper sticker: "Donald Trump: one-third of the National Debt, All the other 44 presidents combined: two-thirds.
Indeed, if the Democrats decide to make this a core issue, the messaging practically writes itself. They would need to focus on two things, in particular, that they are probably already planning to focus on anyhow (because both are also in the general realm of "corruption"). The first is that Trump has twice signed into law blowing-a-hole-in-the-budget tax cuts that primarily benefited wealthy people. The second is that Trump is spending some meaningful chunk of money on things that primarily benefit Trump, whether it's all the golf trips or it's the Arc de Trump or whatever. We recognize that the tax-cut bills are complicated, while the golf/monument money is a relative drop in the bucket. However, these are the budget-related issues that are most likely to get voters' blood boiling.
Certainly, the White House recognizes it has a potential political problem on its hands. Yesterday, Vice President J.D. Vance was dispatched to do an interview with Newsmax, which apparently is still in business. And the VP offered up a very simple explanation for what has gone wrong here. His explanation is—wait for it—it's all Joe Biden's fault. "Even though the debt is too high, even though we inherited this debt bomb from the Biden administration, we actually do have a plan to get the economy growing faster than the debt," were his exact words.
It is remarkable how, in Elephant World, Joe Biden was able to wreak so much havoc while simultaneously being so incapacitated or incompetent. The fact of the matter is that the debt grew by about $9 trillion under Biden, which is certainly a lot, but is obviously affected by the pandemic. It's also similar to the $8 trillion figure for Trump v1.0, and it's less than the nearly $12 billion and counting for Trump's combined terms. The more important issue, politically, is that blaming the former guy eventually stops working. That is particularly true for an administration that blames Biden for everything. Eventually, most voters start to suspect that the boy crying "wolf!" doesn't know what he's talking about.
We really can't think of a national election in the past half-century where the outcome was substantially affected by the state of the national debt (unless there were other economic issues in play at the same time, like the stagflation of the 1970s). However, we could be looking at a perfect storm here. And, truth be told, the U.S. does have plenty of other economic issues in play right now, so it could be a replay of, say, 1978. In case you're wondering, the Republicans flipped three Senate seats and 15 House seats in that one. Certainly, we'll be keeping an eye on this (potential) storyline. (Z)