The new year hasn’t brought any respite from the mounting debt burden of the U.S., and the Treasury’s debt tracker shows that the national debt surpassed $34 trillion for the first time ever last week.
What Happened: The national debt, currently at $34 trillion, crossed the $1 trillion mark in 1982 and has seen a steep ascent since then, according to Treasury Department data. The $10 trillion level was breached in 2008, and the next trillion was added in 2017. The debt pile soared past $30 trillion in fiscal year 2022.
What’s National Debt: Government debt is the amount of money the federal government has borrowed to cover the outstanding balance of expenses incurred over time. It raises money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities, or TIPS.
The national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities.
Why Debt Pile Is A Threat: The growing U.S. debt poses risks for both the economy and markets. The U.S. federal government debt is now at its highest percentage of GDP since World War II, according to a report by the Council on Foreign Relations in December.
Mounting debt can soon diminish economic growth, restrict government spending on important programs, and raise the likelihood of financial crises, economists say.
It is also a threat to U.S. global leadership, given the dwindling dollar at its disposal for military, humanitarian, and diplomatic operations worldwide.
When debt reaches unsustainable levels, investors may lose confidence in the government’s ability to attain fiscal discipline and clamor for higher interest rates for their capital. This would result in a spike in debt servicing costs, which is called a debt spiral.
Morgan Stanley’s Lisa Shalett said in an October report that the higher cost of borrowing arising out of U.S. debt accumulation could weigh on consumer and business spending, overall economic growth, and financial markets.
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Economists React: The development has elicited strong reactions from economists, who decried the government’s mismanagement of finances.
Economist Peter Schiff said in a post on X, formerly Twitter, “2024 will set a record for the largest one-year increase in the U.S. National Debt in history.”
“The only question is, will there be a sovereign debt or #dollar crisis before the year ends,” he added.
Following the debt crossing the $34 trillion threshold, Michael Peterson, CEO of the Peter G. Peterson Foundation, said, “The debt rises unabated because of well-known, structural drivers, including an aging population, high healthcare costs, rising interest costs, and a tax system that doesn't fund what we've promised.”
He also raised the specter of programs such as Medicare and Social Security going out of funds within a decade. “Despite these clear and present fiscal dangers, our leaders are still debating this year's appropriations, with a potential government shutdown looming,” he added.
Against this backdrop, Morgan Stanley’s Shalett in October recommended moderating overweight positions in equities and adding to positions in real assets such as gold and other commodities, infrastructure, energy transport, and non-commercial real estate.
Reflecting the risks, gold ran up in 2023, with the SPDR Gold Shares GLD rising about 13%. The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund that tracks the broader S&P 500 Index, ended Tuesday’s session down 0.56% at $472.65, according to data from Benzinga Pro.
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