Unpacking the US Debt Crisis: Will It Ever End?

Okay, so this is crazy. The one time that the U.S. paid off its entire national debt, it triggered one of the worst economic crashes in history. Imagine wiping the slate clean and then watching the whole system collapse. What you're about to learn will flip everything you thought you knew about government debt. And by the end of this video, you'll see why being debt-free might actually be the most dangerous idea of all. This is why the U.S. will never be debt-free. Okay, so let's start by talking about the last time that the U.S. paid off its debt. Believe it or not, in 1835, the U.S. paid off its debt completely. No national debt, no nothing. In fact, they completely dismantled the central bank. This is the only time in history that the U.S. had zero debt. Because at the time, President Jackson, like many other people today and back then, hated debt. So he decided to sell off federal lands in order to pay it down to literally nothing. And at the time, this seemed like a really good idea. But just two years later, by 1837, the U.S. was borrowing again. And believe it or not, it was the paydown of the national debt, the elimination of the national debt, that led to the Panic of 1837, one of the worst economic catastrophes of all time. There was literally no more national bank. Money was being sent from the government to poorly managed state banks because there was no longer a national bank. And this led to too much easy credit. When those poorly managed state banks got the opportunity to lend because they had so much more money available than they had before, it caused an absolute catastrophe, one that is pretty similar to the one that happened in 2008. And all of this risky debt and all of this extra lending led to a speculation boom. People started using this risky debt because there was an excess amount of money to be lended in order to start buying land, an investment that many believed couldn't go down in value, kind of like in 2008. But just a couple of years later, that speculation boom collapsed. And at the same time, Great Britain, who was the single biggest lender to the United States at the time, well, they started raising interest rates and put an all-out stop on lending to the United States, by the way, at the exact point in time where the U.S. needed the money the most. And it quickly became clear that that national debt, the thing that President Jackson declared to be the enemy, to be evil, to be whatever he thought it was, well, not having it actually created more problems than having it. And I'm going to explain exactly why. But before we get into that, let's talk about what the national debt is. Because the gross debt, all of the national debt, is the equivalent of public debt and intergovernmental holdings. Currently, there's about $29 trillion that are held by the public. This could be institutional investors, it could be individuals, and it could be other countries. And then there's about $7 trillion that the U.S. owes to itself. Or to be more precise, different departments of the government owe to other departments. And most of it is actually two things, Social Security and Medicare. Two social programs, which we'll talk about the importance of those a little bit later on, especially when it comes to politics, that would be almost catastrophic if they were eliminated. But it's not only important to know what the public debt is, it's important to understand why it matters. Public debt is owed to outside lenders, like individuals, banks, foreign countries. And it has a significant impact on interest rates, inflation, and government spending. Now, when it comes to public debt versus intergovernmental debt, the intergovernmental debt doesn't really impact the economy that much. In fact, most economists completely disregard it. It's the public debt and what happens to the confidence in it that has the biggest impact on the economy. Now, many people believe that all of this debt is owned by foreign countries. And the reality is, it's not. About 70% of U.S. debt is held domestically. 30% of it is held by foreign nations or foreign investors. And even though some people believe that China is the biggest holder of U.S. debt, Japan is actually the biggest holder of U.S. debt. Japan has about 3.1% and China has about 2.1%, although China's holdings are declining. And the reason why so many countries hold U.S. debt is because it's deemed to be a safe asset. It's actually better than holding U.S. cash because it comes with a return. And for the last 50 to 100 years, everyone's pretty much agreed upon that it is a guaranteed investment. But over the last several years, that has shifted. And that has led many people to become deeply concerned. And it's particularly concerning because treasuries are so, so, so important, not just to the U.S. economy, but to the worldwide economy. U.S. treasuries are seen as the single safest investment in the world. And because of that, there's consistently high demand. And that demand helps the U.S. borrow at a low cost. They can pay, typically, lower interest rates than other countries because of the security that comes with the backing of the federal government. And not only can they borrow at low rates, but the Global Trust enables perpetual borrowing. The U.S. can literally roll over its debt without ever fully repaying it, assuming that there's still a market for it. And to this point, there always has been. And as long as there continues to be a market, the U.S. doesn't need to repay its debt. It can continue to roll over its debt in perpetuity, as long as the economy grows and investors keep buying U.S. bonds. It essentially allows the U.S. government to keep refinancing all the time instead of ever having to repay it. And even if the U.S. decided that they did want to pay off the debt, there's a danger of paying it all off. In 2001, Alan Greenspan warned that no treasuries equal instability. Because the worldwide financial system actually depends on those treasuries. It's the one place where you can park your money without having to worry about losing it. So without U.S. treasuries, investors, banks, and governments would lose their most trusted financial instrument. The instrument that allows them to lend money to individuals and lend money to companies and price those loans in a way that adjusts for the risk. So in other words, they charge more relative to the risk of U.S. treasuries, and that becomes a profit. But with that basic understanding of debt, the real question becomes, how do we get here? We're at a point where the U.S. national debt is at all-time highs. In fact, from a debt-to-GDP perspective, it hasn't been this high since World War II. And there's good reasons for that and bad reasons for that. Because there are points in time where debt is necessary. In fact, it's beneficial. It's what keeps us from heading into the next Great Depression or the Panic of 1837. And anytime there's wars, recessions, or emergencies, the debt becomes the single best tool that the government has to keep the economy from completely collapsing. During these periods, the government borrows heavily to stabilize the economy. It provides relief and it funds urgent needs, which keeps people employed, prevents them from defaulting on mortgages and loans, and otherwise going bankrupt. And from an economics perspective, these are generally accepted as appropriate uses of debt. Doing nothing in these situations would cause deeper recessions or complete social collapse. So there are times when the U.S. government runs a deficit where it makes sense. But the problem is that these deficits that happen during hard times become routine. Instead of only running deficits when the economy is strong, governments tend to continue running them once they've started. And when times are good but governments continue to run deficits, it's like someone who makes really good money, still using credit cards every month and running up a bill. It's completely unnecessary for them to pad their lifestyle with debt, but they do it anyways. They just can't help themselves. And the same is true for governments. And this is largely why the national debt tends to very rarely go down. Because after a crisis, like a war or a pandemic, the government rarely cuts spending and they're even less likely to raise taxes. So instead of reducing debt, the new higher level of debt becomes the new normal. And political leaders avoid making unpopular cuts or unpopular tax hikes at all costs. And that creates a problem. Because in 2024, the U.S. spent $892 billion just on interest. That's more than it spent on its other single biggest expense, which is the military. And these interest payments are projected to top $1 trillion annually by the end of 2030, which is just five years away. But the bigger problem is that as these interest rates rise, the cost of borrowing increases even if no new spending happens. And unfortunately, we all know that new spending is going to happen. And typically how you measure the relationship between how good the economy is and where the debt is at is using the debt-to-GDP ratio. In 2024, U.S. public debt was about 99% the size of the entire economy. So for every dollar that the economy produced, there was a dollar worth of debt. That's literally like an individual making $100,000 a year and having $100,000 in credit card debt. The last time the debt was this high was during World War II when they were funding the war. And this raises concerns about sustainability. Can we continue to spend and borrow as interest rates go up without the risk of doing major damage to the economy? Because the higher the debt-to-GDP ratio is, the harder it becomes to grow out of debt without major changes. Things like significantly higher taxes and the complete annihilation of social programs. Things like Medicare and Social Security. And it's becoming more and more questionable as to whether or not the U.S. can sustain the national debt. Because it's crystal clear that the higher interest rates go, the harder it becomes to service that debt. And not only that, all of the debt that's rolling over on 5, 10, 30-year terms now has to be refinanced at higher interest rates, which is compounding the problem even more. But the debt isn't really the real problem. The real problem is the political problem. Because cutting spending or raising taxes is unpopular. So politicians tend to avoid it at all costs. Voters want services, but they don't want to pay for it. They don't want to pay higher taxes. And tax cuts and new programs keep adding to the debt. Every time a politician floats a tax cut in the hopes that they'll get voted in, what they're really doing is saying they're going to make the problem worse. And when you add to that, that there's consistently a gridlock between Democrats and Republicans in U.S. politics, well, it makes fixing the debt even harder. Because gridlock equals perpetual borrowing. If both parties aren't in agreement that the debt needs to come down, it's never going to come down. Which leads us to why it's so hard to change course. First of all, there's the whole debt ceiling drama. Many people believe that the debt ceiling is the point where the U.S. is going to default, which they would if they didn't raise the debt ceiling. But what most people don't realize is that the debt ceiling is just this artificial ceiling that the U.S. government has put on spending, probably because it's necessary. But it also leads to gridlock in the government, where there's basically political trading that gets certain members of the government the things that the small groups of people that are lobbying them want in exchange for what other members of the government want. And eventually, Congress just raises the debt limit because all the individual members of Congress got what they wanted, but they do so without fixing the problem. In some cases, it even becomes a tool for the government to spend more instead of really taking a look at the amount of money that's being spent and reducing it. And fixing these issues, because they are so politically risky, leads most of the people that we trust to make these hard decisions to simply avoid them. And in that avoidance and the lack of real, genuine conversations about how bad it is, it leads to a lot of myths. So let's talk about the myths when it comes to the national debt. Myth number one is that the national debt is the equivalent of household debt. But there are some distinct differences between government debt and personal debt. The first is that the government doesn't ever retire or die like a person. So in theory, at least, they're always going to have an income. There's no need to pay off the debt, because unlike an individual who might retire and have a reduced income or die and just not have an income at all, obviously, the government will always be able to tax people. And in theory, they'll always be able to print money, which allows it to keep borrowing and refinancing its debt instead of paying it off all at once. So unlike a household, which eventually is going to lose a large majority of its income, the government can simply raise taxes or create money to cover its obligations. It's basically got an unlimited money glitch, at least to a certain point. But that creates a resistance to actually addressing the problem and reducing the debt because, well, they don't have to. Myth number two is that we're burdening our grandkids. A large part of the debt is owed to American citizens, not foreign countries, which means that future generations are also going to own government bonds, and they're going to benefit from what the debt funded. So even though we're, in theory, burdening our grandkids with this debt that the U.S. government has run up during our generation, the reality is, as much as we have an obligation not to settle our grandkids with that debt, we also have an obligation to make sure that the country is as good, if not better, for them. Future generations are going to benefit from what today's debt helps build. If we were to eliminate spending on things like that, can you imagine the country that our kids and our grandkids would get 30 to 50 years down the road? It would be awful. So the real burden for our grandkids would be not investing in their future at all. But here's the most important point. It's about balance. It's about doing enough for them now, investing in the country now, keeping America great, so to speak, without leaving them too much debt to deal with later. So smart uses of debt today can actually benefit our grandkids down the road. It can actually make them better off, and it will. It's like investing in buying a house at an early age and getting a mortgage, knowing that you're going to pay it down, so that somewhere down the road, you're going to have a paid-off mortgage, and you're going to own the house debt-free at around the time when your income is reduced. Although the key difference here is that we're not going to pay the debt off, we're just going to try to keep growing the economy. And the hope is that the economy grows enough that the U.S. Federal Reserve doesn't have to continue to print money. Because obviously, printing money leads to inflation and rising prices, but it doesn't mean that the country is going to go broke. So the real limit to the national debt is actually rising prices and inflation, because low inflation keeps interest rates stable, and that allows the economy to grow, and it allows the government to continue spending without too much risk of defaulting. So in many cases, eliminating debt, reducing debt, while it might be wise, it also might be dangerous, because there are indeed productive uses of debt. Borrowing isn't always bad. It can be smart when used for long-term benefits, doing things like funding highways and education and innovation. And if used wisely, debt today can lead to a stronger, wealthier future. But again, it's about finding that balance. Not spending too much, while spending in the right ways so that we do in fact become wealthier as a whole. And then there's, of course, myth number three, and that's that the debt ceiling is practical. It's not. It's political. The debt ceiling doesn't actually control new spending. It just allows the government to pay bills it already owes. It's an artificial limit that Congress sets and raises repeatedly. In practice, it's become a political bargaining chip, not a real financial tool. It is literally completely made up. And it leads to standoffs that create drama and uncertainty, leads the stock market to tank, but rarely does it lead to actual debt reduction or even spending reduction. So even though the national debt is big, it's not the thing that's crashing the economy. What's crashing the economy, what could crash the economy, is global sentiment around how stable the United States is as the global superpower. And all of these calls for the U.S. to completely pay off its debt, well, they're not realistic, and they're also not necessary. What matters most is managing the debt wisely so it doesn't grow out of control. And if the government can in fact manage it wisely, the buyers of U.S. debt, including other countries, will continue to have confidence in what is the safest investment in the world, and they'll continue to buy it. The real fear is what happens when everyone stops buying the U.S. debt. And if you want to see what happens in that case, make sure you check out this video right here.