Rising U.S. Debt a Financial Crisis in 2017
It takes a lot of money to run the U.S., apparently; unfortunately we don’t have enough to do it on our own. As a result, the U.S. is in a lot of debt. And the amount is rising astronomically. Right now, the U.S. national debt stands at an eye-watering $19.97 trillion. And it’s growing at a rate of more than $14,000.00 per second. Rising U.S. national debt is out of control, and the U.S. national debt forecast suggests the U.S could face an economic crisis in 2017.
In a nutshell, debt is how much you owe a lender; this is true for people, corporations, and even countries. Good debt is when you borrow to invest in economic growth. Bad debt is when you borrow to please voters.
The U.S. first got into debt to help pay for the Revolutionary War. To help, Benjamin Franklin negotiated over $2.0 million in loans from the French government. You could say this was good debt. Since then though, with the help of good and bad debt, the U.S. national debt level has been growing steadily. (Source: “U.S. Debt and Foreign Loans, 1775–1795,” Office of the Historian, United States Department of State, last accessed February 24, 2017.)
How much is the national debt? Today, the U.S national debt stands at $19.97 trillion, equivalent to $61,555.00 per American. And it’s growing at a rate of over $1.0 trillion each year. In fact, it should top $20.0 trillion in the coming weeks, though that probably won’t attract as much attention as the Dow Jones Industrial Average topping 20,000. (Source: “U.S. Debt Clock,” US Debt Clock.org, last accessed February 27, 2017.)
When we talk about the national debt, there are actually two different figures at play: public debt and intragovernmental holdings. Intragovernmental debt (roughly 30% or $5.5 trillion) is made up of money the U.S. government effectively owes itself to fund current operations. The biggest items include Medicare, Social Security, and defense.
Public debt is, as the name suggests, debt held by the public through bonds, treasury bills, and notes. This includes households and non-financial corporations, the financial sector, the government (Fed banks, and state and local governments), and the rest of the world—which makes up the bulk of public debt (Japan and China are the two largest holders of U.S. debt).
Add it up, and the U.S. national debt is the largest in the world for a single country. As time goes by, demographics and politicking, along with federal and global economic issues, suggest things will get a lot worse before they get better.
Barack Obama and George W. Bush’s Legacy of Debt
Today, the U.S. national debt is greater than what the U.S. produces in a single year. The debt-to-gross-domestic-product (GDP) level is at 106.73%; this is the second-highest level in U.S. history. After WWII, it peaked at 121.70%. In 1988, it was only half of the country’s output. No matter how you look at it, the U.S. will have more than a little difficulty repaying the loans.
How did the U.S. national debt get to be so massive? The national debt is an accumulation of:
- Budget deficits (programs and tax cuts we can’t pay for)
- Borrowing from the Social Security Trust Fund (surplus from Baby Boomers)
- Strong U.S. dollar
- Low interest rates
- Rising debt ceilings
President Donald Trump inherited a huge national debt. Each president since John F. Kennedy (with the exception of George H.W. Bush) has steadily increased the national debt. The biggest increases in the national debt, by far, came from President Barack Obama and President George W. Bush.
Under President Obama, the national debt grew by $7.91 trillion, or 68%. Admittedly, President Obama did take over during one of the most economically contentious times since the Great Depression. Obama’s spending included the economic stimulus package ($787.0 billion), which cut taxes, extended unemployment benefits, and funded public works.
Obama also increased defense spending up to $800.0 billion a year. Mandatory spending for social security and Medicare was also up at a time when federal income was down.
Obama also introduced the Patient Protection and Affordable Care Act, affectionately referred to as “ObamaCare.” It was designed to reduce debt by over $140.0 billion over 10 years. Time will tell.
George W. Bush
President Bush is responsible for the second-biggest increase to the national debt, at $5.85 trillion. Bush’s tenure came during the 9/11 attacks, which resulted in the War on Terror. This increased military spending to record levels.
In response to the 2001 recession, Bush also passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). In response to the 2008 financial crisis, Bush approved a $700.0-billion bailout package for Wall Street. Bush also had to pay for higher Social Security and Medicare spending.
An Economic Crisis under President Trump in 2017?
Yes, Trump inherited a mess from Obama: national debt of $19.9 trillion, deficit of $559.0 billion, a stagnant economy, and increased spending. But there’s more to the trainwreck national debt than reckless spending.
The big question now is, how will Trump’s economic policies impact the U.S. economy and national debt? Chances are, unfortunately, quite good that the national debt crisis will get even worse under Trump. And the U.S. economy? That’s open for debate.
First things first, according to the overly optimistic Congressional Budget Office, Trump inherited a national debt above $19.0 trillion, 2017 deficit of $559.0 billion, and a still sluggish economy. Not only did Trump’s presidency begin with the second-highest debt-to-GDP ratio ever, but debt under current law is forecast to rise unsustainably over the next 10 years. (Source: “The Budget and Economic Outlook: 2017-2027,” Committee for a Responsible Federal Budget, January 24, 2017.)
That means, before Donald Trump’s tax cuts even take place:
- Trillion-dollar deficits will return … and swell to $1.4 trillion by 2027.
- Debt held by the public will soar from $14.2 trillion to $25.0 trillion in 2027.
- As a share of GDP, debt will rise to a record high 89% by 2027.
- Debt will reach its war-time record by 2035 and total 145% of GDP in 30 years.
- Annual spending will climb by $2.6 trillion by 2027, with 70% of that coming from Social Security, Medicare, and Interest.
- Real economic growth will average just 1.9% over the next decade, half the rate of what Trump campaigned on.
What will the national debt look like in 10 years? According to the Congressional Budget Office (CBO), annual deficits will reach $1.0 trillion by 2023 and $1.4 trillion by 2027. The deficits will increase debt even further. Public debt is expected to rise from $14.2 trillion at the end of 2016 to $24.9 trillion at the end of 2027—a 75% increase.
As a share of the U.S. economy, the national debt will rise from 77% of GDP in 2016 (twice what it was in 2007) to 89% by 2027.
During the election, Donald Trump said he was going to cut taxes and spend $1.0 trillion on infrastructure. Cutting taxes and increasing spending has the unwanted side effect of increasing the national debt.
When you add up President Trump’s tax cutting and $1.0-trillion infrastructure spending plans, the national debt is expected to climb by an additional $6.0 trillion over the next decade.
So, instead of the national debt simply growing by an additional $1.0 trillion a year, as it has been, it will grow by $1.6 trillion. By 2027, the national debt could stand at $36.0 trillion.
Even this may be far too conservative. The current $19.9-trillion national debt crisis does not take into account unlisted liabilities, unfunded retirement, and health care commitments.
Higher Interest Rates Will Worsen the National Debt
In December 2015 and December 2016, the Federal Reserve increased its target for the federal funds rate by 25 basis points, the second such increase in just a decade. Raising rates is essentially a vote of confidence from the Federal Reserve, suggesting the U.S. economy is strong enough to support a rate hike.
But even gradual rate hikes could have severe consequences on U.S. debt levels. In the private sector, interest rates on business mortgages, car loans, and mortgages will rise. Interest rates on government securities will also increase; that means increased borrowing costs, which will cobble the national debt.
Rising interest costs also threaten important public investments that can fuel economic growth. The CBO estimates that by 2046, interest costs will be more than double what the federal government historically spends on R&D, non-defense infrastructure, and education combined! (Source: “CBO: Long-Term Budget Outlook Worse Than Last Year,” Peter G. Peterson Foundation, July 12, 2016.)
Is U.S. National Debt Actually Closer to $200 Trillion?
The official national debt is $19.9 trillion, but that’s just the tip of the iceberg. There is a lot more unofficial debt compared to the official debt. No, this is not an alternative fact buried at the back of a self-published book by a self-proclaimed economist.
A huge financial crisis facing the American taxpayer, for now and centuries to come, is unfunded liabilities. That is, the fiscal gap between the promises made for spending (Social Security, Medicaid, Defense, etc.) and expected tax revenue.
That number, depending on the source, varies anywhere from $100.0 trillion to $211.0 trillion. THAT is true indebtedness.
To eliminate the fiscal gap, Trump and his successors will have to increase taxes and reduce spending, something that Washington is not willing to do.
Out-of-control spending will lead to another financial crisis. Yet it’s hard to believe that at current levels, the debt crisis isn’t anywhere near running at full steam. It’s just getting started.
Global Economic Crisis Will Weigh on U.S. National Debt
The U.S. is not an economic island, and Donald Trump’s “America First” policy could have devastating consequences to the U.S. economy, adding to the country’s national debt crisis.
A trade war with China or Mexico would hurt corporate America and the average American. That’s because China and Mexico would almost certainly retaliate with their own tariffs on goods imported into the U.S.
Trump has tossed around the idea of a 35% tariff, which is huge. But economists say that even a 10% tariff imposed on China would result in exports to the U.S. falling by as much as 25%. Instead of purchasing cheap goods from China, Americans will have to spend more to buy the same products from somewhere else.
If Beijing retaliates with its own tariffs, U.S. economic growth could slow by a quarter percentage point. This is a big number when you consider that the U.S. economy advanced just 1.6% in 2016. (Source: “Donald Trump trade war would hurt US and Chinese economic growth,” Independent, February 8, 2017.)
Trump’s foreign trade policies could also undermine the U.S. economy and send the national debt levels soaring because the rest of the world simply isn’t doing that well economically. And a global economic crisis would have serious consequences for the U.S. economy and national debt.
One area of concern is the eurozone, the world’s biggest economic region. In addition to ongoing concerns about Greece’s possible exit from the euro, Italy and Portugal are saddled with mountains of debt and flatlining economies. Emerging economies are also a risk. China, Brazil, Mexico, Russia, and Turkey are all struggling.
Against this economic backdrop, the Trump administration wants to cut household and corporate taxes and increase infrastructure and defense spending in an effort to boost economic output from its current pace to three and four percent.
On the surface, this sounds great, but is it even possible? If the U.S. economy doesn’t experience phenomenal economic growth, the budget deficit will soar and add to inflationary pressures. This would force the Fed to raise rates and drive the strong U.S. dollar even higher.
What we’re left with is a global economy that is struggling and dealing with rising U.S. interest rates and a strong Greenback. This would restrict global trade.
Without question, the national debt is a new financial crisis. And at $20.0 trillion and soaring, it’s getting worse.
The U.S. is adding more than $1.2 billion to the national debt load every single day. Worse still, we continue to spend money we don’t have and cut taxes during a period of stagnation. Moreover, the population is rapidly aging and there is less money being collected in taxes to fill the gap. The future looks bleak; best case scenario, the long-term projections aren’t as bad as they appear.
Only our great, great, grandchildren will be able to answer that one.