By Simon Black, Sovereign Man
Well, that didn’t take long.
From the time the US government managed to sign the debt ceiling resolution, it took just thirteen days for the national debt to soar by nearly $600 billion.
At that pace, they added over $500,000 to the national debt every second.
The US national debt has now breached $32 trillion… meaning America’s debt-to-GDP ratio is now 121%. Historically, advanced nations tend to get into trouble when debt-to-GDP reaches around 90%. The US is way past that threshold — but I’ll return to that point in a moment.
First, any time there’s a discussion about the national debt, invariably some idiot says something stupid like “the debt doesn’t matter because we owe it to ourselves.”
This is one of these irrational aphorisms (like “silence is violence”) that people like to repeat over and over again until they believe it to be true. But it’s not true. The debt matters. But let’s first examine who owns it:
Foreign governments like China, Japan, and Saudi Arabia hold a combined $7.4 trillion of US debt.
The Federal Reserve owns $5.1 trillion of US debt.
Social Security owns another $2.7 trillion of US debt, which of course is money owed to American retirees. Similarly, the Military Retirement Fund holds about $1.36 trillion.
State and local governments hold about $1.55 trillion combined in US debt.
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Mutual funds own another $2.84 trillion.
Banks own trillions worth of the national debt. Banks buy US government bonds with their depositors’ money, i.e., YOUR money.
JPMorgan Chase alone owns about $300 billion worth of US government debt. Silicon Valley Bank famously held about $120 billion of US government debt before they went bust.
Even the Federal Deposit Insurance Corporation, which is supposed to guarantee bank deposits up to $250,000, owns about $128 billion worth of US government debt.
Then there are countless businesses and individuals around the world who own US government debt, simply because Treasury Bonds are considered “risk free”.
Now, when people say that “we owe it to ourselves”, they mean that most of the debt is NOT owed to foreigners. And this is true. Foreigners own just under 25% of the debt.
But does that make it OK to default on the other 75%? Is it somehow acceptable to default on banks across America, which bought US Treasuries with their customers’ money? Is it OK to default on 50+ million Social Security recipients? Or military retirees?
That’s why the “we owe it to ourselves” crowd is completely delusional. They seem to think that it doesn’t matter if the government defaults on, say, the Federal Reserve, or Social Security. But doing so would cause disastrous consequences — global economic meltdown, national social crisis, etc.
So, in order to avoid a major catastrophe, the debt needs to be repaid.
But with the national debt at 121% of GDP, is repaying it even possible anymore?
Technically, yes. And it all comes down to growth.
Back in the 1980s and 1990s, the US economy grew an average of 3.3% per year after adjusting for inflation; economists call this “real” GDP growth.
But real GDP growth since 2000 has been much lower, averaging just 2%. And it turns out that the 1.3% difference in growth has had an enormous impact.
To give you an example, if real US economic growth had remained at 3.3% for the past 20 years, government tax revenue (which averages ~18% of GDP) would have grown substantially.
Along with some very modest spending restraint, budget deficits would have melted away over the past two decades, and America’s debt-to-GDP ratio would today be less than 50%… and falling.
And by 2033, the US national debt would be zero. Social Security would be completely funded. The US would have no financial challenges whatsoever. And the US dollar’s dominance would be sacrosanct.
Economic life today would be a completely different reality… if the US economy had only grown more quickly.
It’s not like an additional 1.3% growth isn’t achievable; again, the US consistently hit this number for decades.
You’d think that politicians would understand something so obvious, and that they’d do everything in their power to maximize growth. They’d embrace capitalism, cut red tape, create incentives for production, support small businesses, make taxes more efficient, etc.
Or at a minimum, they’d simply stay out of the way.
But instead, they do the opposite. They paid people to stay home and not work. They single out critical sectors (like energy companies) and punish them. They constantly threaten businesses, invent new regulatory burdens, stifle innovation, and attempt to systematically destroy capitalism, brick-by-brick.
So, no, based on current trajectory, it looks like the debt problem will keep getting worse… until the catastrophes of default are unavoidable.
The federal government has already acknowledged that Social Security’s trust funds will run out of money in about 10 years. This means that, at best, America has less than a decade to turn itself around.
Again, technically this IS possible. But time is running out. And this is why it makes so much sense to have a Plan B.
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He is an international investor, entrepreneur, and a free man. His daily e-letter, Sovereign Letters, draws on his life, business and travel experiences to help readers gain more freedom, more opportunity, and more prosperity.
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