So, we basically went from the longest economic expansion in history to a $1.8 trillion deficit and so much debt that it could soon exceed our entire gross domestic product. How does that wise saying make hay while the sun shines sound right about now?
This has gotten completely out of control.
Eight months before the One Big Beautiful Bill passed, Larry Fink, the chairman and CEO of BlackRock, sent up a warning flare in a Wall Street Journal guest essay: “From 1789 to 1989, the U.S. government amassed $2.9 trillion in debt. Coincidentally, the infamous ‘debt clock’ was installed near New York’s Times Square in 1989. In the 35 years since, the country has added another $33 trillion. In nominal terms, that’s more than 10 times the debt in one-sixth the time. The more crucial measure is how fast debt has risen relative to the economy. It has grown nearly three times faster than gross domestic product. This year, net interest payments alone are projected to surpass $890 billion, which exceeds defense spending.”
It would be one thing if we borrowed all this money to buy ourselves state-of-the-art airports, subways, railways and ports; sophisticated fiber-optic lines, bandwidth and wireless networks; modern schools, roads, bridges, levees, dams and water systems; hi-tech electricity-distribution grids; or extensive high-speed rail systems.
But that’s not what we have spent our money on. Except for President Biden’s Infrastructure Investment and Jobs Act – which has tons of waste and other issues when you look closely, as we will in the next section – we have borrowed for consumption, not investment. As a result, we don’t have squat to show for our trillions of dollars of debt. Nothing. Nada.
We don’t have to be Nobel Prize-winning economists to understand that continued borrowing for consumption rather than investment is not good. We don’t need a Ph.D. in economics to understand that there is a significantly negative relationship between crushing debt and economic growth.
As you know, we hate being a buzz kill, but it would be irresponsible to not paint a true picture of our predicament, even if the picture ain’t pretty.
If we allow this recklessness to continue, our government will eventually become basically paralyzed. The United States of America will be unable to borrow money to respond to short-term financial emergencies such as wars, recessions, or economic calamities like the 2007-2009 Financial Crisis (when we desperately needed our public balance sheets to offset the enormous de-leveraging of private ones) or things like the economic fallout caused by the COVID-19 pandemic (when American families were in dire straits).
If we keep borrowing, we will eventually be unable to find financing for our long-term productive capacity, where borrowed money can be repaid with actual income. Interest rates will likely increase, which will exponentially increase the pain of our indebtedness and make it more expensive, if not impossible, to raise capital, invest in innovation, and create jobs.
We will be at the mercy of foreign countries who already own 9 trillion – or 25 percent – of our public debt (Japan holds $1.135 trillion, the United Kingdom $809.4 billion, and China $756.3 billion). At some point, investors will lose confidence that we can repay our debts or have the political will to, which could initiate a debt crisis and worldwide panic. Next comes a run on the dollar.
Inflation will come in hot which, as we well know, causes serious short-term pain for most American households. Longer-term, high inflation strikes at the very heart of the financial security of the middle class, affecting savings accounts, pensions, and home ownership.
Not to mention that, thanks to years of financial irresponsibility, inflation is more dangerous than ever since both federal and corporate debt is so high, and the balance sheet of the Federal Reserve is so bloated. These factors alone could greatly diminish the effectiveness of a reduction in bond purchases or higher interest rates – tools the Fed uses to address inflation.
< Note: In 2008, right before the financial crisis, the Fed’s balance sheet was $900 billion. By 2015 it had ballooned to $4.5 trillion. Today, it is $6.7 trillion. >
Fear should not dictate policymaking, but this is not unjustified fear. This could very well be our future if we don’t do something fast. The time has come where there is really no choice: This has got to stop. We must be more fiscally responsible.
