Why The U.S. Won't Pay Down Its Debt ?

$33 trillion. That's the current debt of the United States as of September 2023, and $7 trillion of that is intragovernmental debt, meaning the government owes money to itself. If you stacked up the full debt of the United States in $100 bills, you could make not one, not two, but 13 piles of cash as tall as the Washington Monument. America's debt has now surpassed $31 trillion. That's with a T. The government's been spending more than it takes in for decades. National debt is essentially an accounting record the government keeps to track how many dollars it has injected into the economy through money issuance and how much money it has removed from circulation through taxes. It serves as an overall balance sheet of what it owes. Now, does the United States want its debt to be zero? Not really, because even though the government has the capacity to fully cover its debt, debt serves many useful purposes. It's valuable in emergencies like the one experienced during the pandemic, where national debt increased by 90 percent. How to boost our economy and provide much needed relief to millions of Americans impacted by the pandemic. House Democrats have passed a new $3 trillion relief package. However, some economists believe that if the debt continues to increase at such a rapid pace as we've seen in the last five years, it could lead to an unprecedented crisis. So if the country has the ability to pay off its debt entirely, why the U.S. won't pay down its debt? Or rather, why doesn't it want to? Debt plays a crucial role in the economy. Most of the U.S. debt is held by the public in the form of treasury bonds, notes and bills. The government borrows money by issuing promises of payment in the form of bonds, offering to pay a small interest in the future in exchange for people lending their money. In essence, the government exchanges some real dollars for a different kind of U.S. dollar called government debt. Since the U.S. dollar is the world's reserve currency and U.S. bonds are one of the safest assets globally, these treasury bonds are highly sought after by investors. What if I told you there was a near zero risk investment opportunity for your cash that would pay you close to 5 percent on your money, had no early withdrawal penalty, and there was essentially no limit to how much you could invest into it? I'm only trying to tell you about the humble T-bill. To avoid economic crises during emergencies, the government has two options, public debt and tax increases. Public debt is the more efficient tool because it's easier for the government to finance itself with loans than burden citizens with taxes. The problem lies in the fact that in recent decades, state debt has dramatically increased. After the 2009 financial crisis and the pandemic, the value of debt multiplied by 250 compared to the debt value in 2005. Over the past 20 years, the U.S. has borrowed more and more money. As a comparison to the share of GDP, it's around 100 percent, the highest since World War II. Currently, national debt continues to grow, even though we are not experiencing an economic emergency. The government is increasing its debt not only for long-term investments, but also for immediate consumption. Whether it's an individual, a company or a government, if they incur debt for immediate consumption, it weakens their long-term finances. The small detail is that if this happens, it could lead to a global crisis. While debt is a useful tool when the economy is in trouble, it can also be a double-edged sword. One must consider a critical factor called the debt-to-GDP ratio, which means comparing the debt's value to the size of the economy. Currently, the United States is almost at 100 percent of the debt-to-GDP ratio, whereas a more normal range would be around 70 percent. The importance of this ratio is that it indicates whether a country can pay off this debt in the future or not, meaning returning the money and interest to the people who bought Treasury bonds. Congressional Budget Office is now projecting that U.S. debt as a percentage of GDP will reach 195 percent by the year 2050. That is 45 percentage points higher than the agency had projected last year. This is where interest rates come into play because the government has to pay interest on its debt. And as interest rates rise, the payments become larger. In recent years, the Federal Reserve has been raising interest rates drastically. Any hope that interest rates could soon be on the way down have this week been dashed. Central bankers in the U.S. and U.K. confirming the fight against inflation isn't over. Today's data shows many Americans are beginning to really feel the ripple effect of the Fed's interest rate hikes over the past year and a half. The U.S. government began increasing interest rates to control inflation caused by the pandemic. The problem is that if interest rates continue to stay as high as they are now, the government will have to pay a lot of money in interest, resulting in even more debt. Debt helps the economy because it allows for significant initiatives like infrastructure and addressing crises like the pandemic. However, the debt to GDP ratio must be monitored because it truly indicates whether a country can afford this debt or if it's upsetting the balance for the future. The United States is not the only country with massive debt. There are 15 other countries with higher debt to GDP ratios than the U.S., with Japan being the highest in the world. Economists like Stephanie Kelton argue that debt is not inherently bad and point to Japan's economic situation as an example. The Japanese government has been running fiscal deficits basically for the last three decades. Has it been inflationary? No. Has it driven interest rates sky high and crowded out private investment? No. Has Japan faced any kind of a fiscal solvency crisis as a result? No. Traditional economics tells us that if governments don't balance their budgets and keep increasing debt, it will lead to solvency problems, inflation and more. However, Japan serves as a living example that this isn't necessarily the case. Japan's national debt is so colossal that it makes Mount Fuji look like a tiny molehill. With a debt to GDP ratio of over 250 percent, it's safe to say that Japan has taken the concept of borrowing to a whole new level. The United States is one of only two countries in the world with a debt limit, which means whenever it reaches that limit, there are rumors of a possible government default. However, this has happened before and the government simply raises the limit repeatedly. The issue is that increasing the limit is not in the president's hands, but rather in Congress's, making it difficult unless there's a congressional majority in favor of raising the debt limit. This has not only raised concerns among U.S. bondholders and investors, but also deep-seated distrust worldwide. For the first time in more than a decade, the nation's long-term credit rating has been lowered. In early August 2023, one of the world's largest credit rating agencies, Fitch Ratings, downgraded the credit rating of the United States to a slightly lower category, making investing in U.S. bonds less reliable than it was before. As of December 2022, about $7.4 trillion of U.S. debt was held by foreign governments or investors, representing nearly 30 percent of public debt. Now, if foreign countries and investors holding U.S. bonds start to believe that investing their money in these bonds is no longer a secure investment, they will likely want to withdraw their money similar to a bank run, except in this case the bank is the government and the depositors are investors. World government bonds went through an unrelenting sell-off on Wednesday, and that has driven U.S. 30-year Treasury yields to 5 percent for the first time since 2007. Those moves could speed up a global slowdown, hurting stocks and corporate bonds. If a bank run of this sort were to happen, it would become much more challenging for the United States to pay off its debt, since the government wouldn't have enough money to pay all bondholders, resulting in an inevitable global crisis. Ultimately, the U.S. national debt is not being paid off in the short term, meaning bondholders will have to wait several years to receive their invested capital plus interest, providing a period of relative calm for the U.S. government. The trajectory of U.S. debt is concerning, and while it has not yet turned into a crisis, the possibility that it will at some point remains.