Markets and Economy Client Conversations: National debt is less of a problem than many investors think

The federal government has accumulated debt — the sum of its annual deficits — for much of its existence. While high debt periods may give investors cause for pause, it is important to stay the course and not make investment decisions out of fear. When we look at historical data, we find some of these fears may be exaggerated.

As a financial professional, you can help your clients remain on track with easy talking points from our Client Conversations series. This conversation guide covers the following points you can use to help ease your clients’ concerns about this topic:

The US government debt exceeds GDP

The national debt has risen quite a bit in the 21st century. Perceptions may suggest the country’s debt could be a looming disaster that collapses the government under its weight.

But these spikes in debt and recovery can be explained. Large deficits have typically resulted from recessions and crises, when tax receipts declined and the government had to spend to stabilize the economy. For example, the 2008 Global Financial Crisis and 2020 COVID pandemic resulted in unusually large deficits, both which subsequently declined as the crises eased.

The US has remained a very wealthy country with assets far beyond its debt

When it comes to assessing the sustainability of US debt, GDP may not be the best metric. We suggest considering the household net worth instead, which has shown the US’s wealth and resources extend beyond debt. The total US household net worth exceeds $180 trillion — almost five times the size of the nation’s debt. Government assets such as land, buildings, and natural resources also are likely worth more than $200 trillion.¹

US debt has had a captive audience willing to purchase it, and some concerns may be premature

Despite some investor concerns about the US debt, treasuries have been one of the safest and most liquid assets in the world. The federal government owns 20% of US debt, making it the largest single holder. Since this is money the government owes itself, it has no effect on overall government finances. US savers, pensions, mutual funds, and financial institutions own another 40% of US debt. More than 24% of US debt is held overseas. However, it has not been concentrated in one country, nor has it disrupted the US debt market.²

High interest rates and Medicare expenses due to aging baby boomers have also been common causes of concern. While the government spends more than it takes in, it presumably puts borrowed funds to good use. If interest is the cost of borrowing and GDP represents the rate of return, the government can pay down debt if its returns exceed its interest payments. So higher interest rates may only be a problem if economic growth doesn’t keep up.

Because boomers are one of the largest demographics in the US, they were expected to put financial strain on the country through increased medical costs. So far, this risk hasn’t materialized. While most boomers have reached retirement age, Medicare spending has been much lower than anticipated.