The US Literally Cannot Repay Its National Debt.

The US national debt currently sits at $34.8 trillion. For context, the population of the US is currently around 333 million people, so that equates to over $100,000 of national debt per person. But the worrying statistic is not the absolute value; rather, it’s the trend. As my friend Richard from the plane Bagel once said, it doesn't take an economist to recognize that this is a pretty alarming chart.

But the scariest thing about this situation is that the US government can't pay the debt back. Literally, they cannot do it. The Congressional Budget Office has actually said that in 10 years from now, the situation is going to be worse than it is today, not better. So, what does this lead to? Is there a sneaky cheat code the US might be able to use to get around the debt problem?

Well, to get to that, we first have to understand the basics. The government is $34.8 trillion in debt, and they're adding more and more debt to the pile each year. But how does that actually work? Well, just like you and me, a country goes into debt when they want to buy something they can't actually afford.

So, like us, a country has income and it has expenses. If it wants to spend more money than it actually brings in each year, then it can go into debt to raise some more cash. Now, just like us, this debt needs to be repaid, and if you get into a situation where the country can't pay back its debts, the country defaults. Just like a homeowner who can't pay back their mortgage.

So, how does this system actually work? Well, if the government needs some more money, they will sell what's known as a government bond. So, investors will loan out their money to the US Treasury, and the Treasury promises to pay them back plus interest at some stage in the future. Depending on the length of the deal or the bond's maturity date, the interest rate you get might be higher or lower.

For example, right now, the US 10-year treasury yield is at about 4.3%, and that's an annual rate of return. It's also worth noting that it isn't just you or me that can buy these government bonds either. In the case of the United States, a lot of businesses and foreign countries will buy these bonds.

For example, Japan, China, and the UK are huge holders of US government bonds, which means if the US were to default on these loans, that would send ripple effects throughout the whole world. Lastly, another interesting thing to mention is that the US Federal Reserve, which is America's central bank, can also buy treasury bonds.

This is the process the US uses to print money and inject it into the economy. The Federal Reserve will create money out of thin air and then buy government bonds to put that new money into the hands of the government. So, that's how a country goes into debt.

The next thing to understand is, well, what on earth is going on in the United States. Remember, the main reason a country goes into debt is that they spend more than they earn, and this is known as a deficit. So, the worse the annual deficit, the more money the government needs to raise in debt each year.

If the government spends $4 trillion and only generates $3 trillion, they need to sell $1 trillion worth of bonds to make up the difference. Now, have a look at this chart of the US surplus or deficit over the years. Back in the year 2001, the US actually did run a surplus, AKA they earned more than they spent that year, $130 billion in the black.

But what's a little scary is that this was the last year that the US made money. Since that time, have a look at the annual deficit. This is income minus expenses, and as you can see, year by year, the long-term trend is worsening. Even taking out the huge deficit years of 2020 and 2021, the trend is still that the gap between spending and income is getting wider and wider each year.

As I mentioned, what this means is that to balance the books each year, the government needs to raise more and more money. AKA, they need to sell more and more bonds to go deeper and deeper into debt. That’s what we can see in this chart here: in 2001, the national debt was around $10 trillion. But as the deficit has worsened, look at what's happened in 23 years. The debt has ballooned to a staggering $34.8 trillion.

Now, that is a huge debt load, but the problematic thing is that the US can't pay it down, and honestly, they may not want to. Have a look at this—this is the breakdown of this year's budget. So, fiscal year-to-date, the US has brought in $3.29 trillion in income and has spent $4.5 trillion. Since October 2023, they're around $1.2 trillion in the red.

But have a look when we break this down further. How did the government generate their revenue? Well, from taxes: 51.7% from individual income taxes, 34.2% from Social Security and Medicare taxes, and 9.4% from corporate tax. Then, small amounts from excise taxes, estate gift taxes, and customs duties.

Now, let's flip over to the expenses and see what's going on there. 21% of spending has been on Social Security, 14% on Medicare, 13% on interest payments for their debt, 13% on health, 13% on defense, 11% on income security, and so on. You're probably already seeing the issue, right? To fix the deficit, the US needs to either earn more, spend less, or do both—all options of which are very unpopular.

I mean, do you want to pay higher taxes? Of course not. Do you want budget cuts to social security, schools, hospitals, or the military? No, thank you. But this problem, left unchecked, is only going to get worse. The Congressional Budget Office is actually expecting the deficit to grow from $2 trillion in 2024 to $2.8 trillion in 2034.

This worsening of the deficit over time is predicted to swell the US debt-to-GDP ratio from 99% this year to 122% in 2034, surpassing its previous high of 106% of GDP. So, it seems that America is trapped in a bit of a tough spot. You know, cutting back in certain areas is unlikely to be very popular, but also raising taxes isn't very popular either, right?

Now, just to make things worse, the US faces another challenge on top of that—one that they haven't felt in over two decades—and that is higher interest rates. You see, the government doesn't set interest rates; that's done by the central bank called the Federal Reserve in America. Now, while they work with the US government, they're actually separate from them.

Their main job is to raise and lower interest rates to keep the economy and the US dollar as stable as possible. But the problem is on the back of all this inflation we've been seeing over the past few years. The FED has now raised interest rates from zero to around 5.5%.

So why is that important? Well, remember, all of this government debt has a maturity date on it, right? Once the bonds hit maturity, the US pays back the bondholder. Well, in a deficit situation, when these debts come due, the US doesn't have that money to pay back their debts. So, they instead roll the debt over. They sell more bonds to pay off the old ones.

But that's a problem in today's conditions because the previous debt would have been sold at very low interest rates, whereas now the debt needs to be refinanced at much higher interest rates. What this means is that as more and more debts roll over, the amount of interest the US needs to pay each year rises, which increases their annual expenses, making the deficit worse, as we saw earlier.

So far this fiscal year to date, interest has been the third largest expense category for the US. Since October 2023, they've spent $601 billion just on interest payments. Going back to the CBO's report, we can see that over the coming years, that number is only set to rise. They note that in 2025, interest costs are greater in relation to GDP than at any point since at least 1940 and are expected to rise to 4.1% of GDP by 2034, totaling 1/16th of all federal spending.

As you can see, with mandatory costs rising, this is going to greatly reduce the amount of discretionary spending that the government could carry out, which naturally means tougher times, higher taxes, or taking on even more debt to cover the increased interest payments. This is what people are referring to when they talk about a debt spiral: the idea that increased interest rates cause the interest payments on rolled-over government debt to rise, which means that the government simply borrows more money to account for that, which in turn creates an even larger pile of debt with higher interest rates.

Now, obviously, this is an ideal, and debt spirals can sometimes, as the name suggests, spiral out of control. So, the number one option is obviously to try really hard to reduce the deficit and return to surplus in the long run. But with that seemingly nearly impossible in the case of the US, recently some people have been wondering whether the United States might take a different approach—that being inflating away the debt.

How does this work? Well, think about this. Let's go back to 1970 for a second. Back then, the median house price in the US was around $24,000. The average annual salary in America was $771 for a full-time job, and a loaf of bread cost $0.24. Now just imagine you're taking out a mortgage back then. Say you took out the full amount of $24,000. Now we look at that today and say, "Holy smokes, that's cheap! How can that be?"

Today, the same median house will cost you $42,882. Standards have improved since the 70s, but you're still buying a house, right? It's the same base commodity. The reason the same commodity is so much more expensive today, however, is because of inflation. You know, wages have risen, the cost of groceries have risen, the cost of houses have risen, and now we look at that $24,000 loan and say, "Wow, that mortgage is like half of my annual salary today."

Today, that mortgage would be so easy to pay off because our wages are so much higher. Well, this same principle applies to the government's debt. When people say the government can inflate the debt away, what they mean is that the government can get into a massive pile of debt, but then let inflation decrease the value of their currency so that in the future, the government will be paying back all that fixed-rate debt with money that is now worth less.

This is exactly what the US did after World War II. The US used inflation to reduce its debt-to-GDP ratio. So how would this occur today? Well, it has a lot to do with money printing by the Federal Reserve, known as quantitative easing.

So, stay with me here. Let's say the Federal Reserve prints a lot of money and buys some government bonds. This increases the amount of US dollars in existence and it gives new money to the government to spend. Now, what they could do with that money is invest it in creating jobs or building infrastructure or other programs designed at increasing the productivity of the United States.

That's a good thing. If productivity rises, then businesses and workers earn more, which leads to higher incomes and more tax revenue. Lower borrowing costs also mean there's more investment, which causes asset prices to rise, and generally, the inflation rate will pick up too. If this scenario continues, as the years march on, the acceleration of the US economy, the increased GDP, and the continued steady inflation of all things eventually make the past debts look smaller and smaller in comparison, in the same way that 1970 median house prices and median salaries look tiny by today's standards.

So, that's the general theory of inflating away your debt, and it's great in theory, but in practice, it isn't quite as simple as that. That's because there's always consequences in economics. The main problem with the theory is actually one that we face today, and that is when you do employ these stimulative measures to start encouraging inflation, well, you get inflation.

If you leave inflation unchecked, we know from history that it can very quickly get away from you, which can lead to economic instability, social unrest, and, at the extreme, can cause a collapse or abandonment of a currency. Now, as it's been well documented over the past few years, the inflation rates we saw in America and around much of the western world were way too high to be sustained.

Thus, while they might assist in inflating away the US government's debt burden, the Federal Reserve has had no choice but to step in and raise interest rates to try and slow down inflation. Inflation was happening so quickly that it was actually a problem. So by raising interest rates, the FED puts the clamps on the economy and slows it down for a little while.

That's what we're in right now. So, while the theory of inflating away your debt burden might sound nice, in reality, it does come with downsides and needs to be carefully monitored. That's why the Federal Reserve targets a 2% inflation rate as opposed to zero.

It keeps the economy pushing forward, keeps prices going up steadily over time, keeps wages rising steadily over time, encourages spending sooner, which grows the economy. The big long-term benefit from a debt perspective is that slowly but surely devalues the currency, making debt repayments from year to year easier and easier.

So overall, that's the process of how the government and the central bank can team up to lower the debt burden over time. But with all that said, I think it is worth remembering that the number one way to keep on top of the debt situation in the United States is going to be through smart fiscal policy, with a particular emphasis on lowering the deficit.

At the end of the day, the most sustainable long-term approach to a country's debt management is not to inflate the debt away; it's just to have a country whose financials work. So while there might be some tricks you can pull out of the bag, the number one focus, at least in my view, is that America should focus on being more productive and try to tighten the belt where it makes sense to do so.

You can take my home country of Australia, for example. Now, it is a different economy, but you know, the same principles apply. For example, Australia's budget outcome for our financial year ended on the 30th of June 2023 showed that while we too had some debt on the books, with gross debt of around $890 billion Australian dollars or 35.2% of GDP, we too had to pay interest on that government debt, around $11.9 billion Australian dollars.

This is less of an overall issue because the government returned a surplus of $22.1 billion. So, in Australia for that year, the government's cash coming in exceeded its expenses. So, the government made money. That's the ultimate win because then they can decide to put that money to use building roads or schools or paying down debt if they want or even doing tax cuts, which they did.

But overall, that is the story behind America's debt situation. Also, one thing I did just want to mention before I sign off: I've been making a lot more Instagram content recently. I've actually been really enjoying it! So, if you are an avid Instagram user, please check out the link in the pinned comment and come follow me over there as well. I'd really appreciate the support over there.

I am trying to grow up my Instagram presence a little bit more, so I definitely appreciate you guys coming over and helping me out. Lastly, if you would like to support the channel and learn the proper step-by-step method to getting started in your investing, please check out "Stock Market Investing for Beginners" or "Introduction to Stock Analysis" over on New Money Education. The link for that can be found down in the description.

But with that said, guys, thanks very much for tuning in. I hope you guys enjoyed the video. Please leave a like on it if you did, and I'll see you guys in the next one. [Music] [Music]