How Much Debt Is Too Much? 9.9.26
In addition to trying to do some writing, taking care of the farm, enjoying our grandchildren, maintaining our Lake House, spending a lot of time with the Louisa Education Foundation, and not to mention traveling a little, I do have a day job as a municipal advisor. Yes, it is part time, but with a current stable of 10 clients, it does take a little time. So, every now and then I write a Market Update for the industry. The links will take you to the Pearl Creek Advisors’ Website, where the most recent market update resides. Here is why you may want to read it. The United States cannot continue on its current trajectory of accelerated spending and borrowing. It is unsustainable. And every U.S. citizen needs to understand and acknowledge this reality. And when we do, we should hold our politicians accountable.
The U.S. national debt in now over $40 trillion, having increased from $10 trillion 20 years ago. Estimates are that our National Debt will hit $50 trillion quickly. Our debt now represents 122% of GDP. As reported in our last Market Update, most economists agree that when a country’s debt exceeds 80% of its GDP, it is difficult to create economic growth because government debt crowds out private investment. In addition, our annual cost to service that debt is now $1 trillion a year, close to 20% of our total annual federal spending. This lowers funds available for spending on other needed services such as healthcare, housing and education.
Unfortunately, other sovereign nations have the same problem. In France, public debt exceeded 3.5 trillion euros (about $4 trillion), which is 117 percent of the size of its economy. In Japan, the government is spending heavily despite a public debt pile that is more than twice the size of its economy. In the eyes of investors, many politicians don’t appear worried enough about these debt levels. Instead, investors see government plans that are not likely to shrink budget deficits. And so, with expectations of more borrowing to come, investors are demanding higher returns to hold government bonds of all countries. See the graph below on the history of 10-year government bond yields.
As a result, global bonds sold off sharply last week (lower prices which increases yields) extending a rout that is raising borrowing costs to multi-decade highs as the Middle East conflict pushes up energy prices, playing into investor fears about inflation and ballooning government debt. Higher yields on Sovereign Debt means higher mortgage rates for consumers and tough choices for government spending as funding costs climb. On a recent auction of U.S. Treasuries, the United States paid the highest borrowing costs to sell 30-year bonds since 2001, as investors seem to be concerned about the country’s mounting debt.
So, somehow our country needs to develop the political willpower to come to a consensus for some combination of more tax revenue and spending cuts. Not even the downgrade of ratings on our Government Debt in 2011, 2023 and 2025 has created any sense of urgency. And given our current political divisiveness, most people are not optimistic that we will address our huge debt problem any time soon. Unfortunately, as I explain in the PCA September Market Update, we also have some long-term structural issues that will make reducing that long-term debt even more difficult in the future. I am not here to be doom and gloom pessimist. I am a realist. And the reality is that we need create some financial accountability as a country, just as we demand of individuals.
