INFLATION WARNING: The 2020 DEBT Bubble Explained

What's up guys, it's Graham here!

So, I want to take some time to address a recurring comment and concern that's been showing up a lot on my channel lately, and that would be: Is Carole Baskin guilty? And did she do it? To which I say, possibly. But I think it's very important we keep an open mind, and hopefully keep an eye out for season 2 of Tiger King, and we'll see if Netflix does that.

Okay, no, but seriously, one of the comments I see being brought up a lot lately is about the massive debt here in the United States, otherwise known as the upcoming debt bubble and what that means for the future of our money.

After all, at the time I’m making this video, the United States is nearly 25 trillion dollars in debt. If things continue as they have been with more stimulus being added on top of this, we could very well be seeing 30 trillion dollars worth of debt in the next year.

Now, in terms of just how massive 25 trillion dollars is, that’s enough to pay off everyone's mortgage debt in the United States, and have money left over to pay off everyone's student loan debt, and still have money left over to pay off everyone's auto loans, and still have money left over to give everybody a $25,000 check. That is how massive 25 trillion dollars is.

But as this debt continues to grow larger and larger, with no signs of slowing down, it does raise the question that Joe Exotic framed it in, in terms of the subject of this video: Is all of this outstanding debt something to worry about? How is it ever gonna actually be paid down? And what does this mean for you and me in terms of the value of our money and our entire economy?

Oh, and one more thing before I forget, if you smash the like button on this video, I’m gonna be smashing the like button on your comments. I think it's only fair. If you smash my like button, I’ll do my best to smash yours. And I know, obviously, I can't get to everyone's comments, but I will be doing my best to go through all the comments, read them all, and just continue smashing like buttons as much as I can.

So, of course, with that said, let’s begin the video!

So first, let’s start here: Why don’t we even need, or have to have, a US debt to begin with? You would think in a perfect world you’d just buy things when you need them with money that you could afford to pay for outright, and then you don’t take on any debt. It would be like thinking: Don’t borrow $20,000 to go on a Hawaiian vacation when you only have $200 in the bank. That would be really bad.

So in that train of thought, is 25 trillion dollars worth of national debt any different?

Well, how it works is actually a little bit different. It’s not like a person out there who’s in a whole bunch of debt because they’re living above their means, buying things they can’t afford. It’s very easy to point their fingers at them and say, “You bad! Don’t be in debt like that! Pay it off! Be a financially responsible adult!” - shame on you!

But running a country does not usually work that way, and here’s why. See, the United States is, at its core, kind of like a business. It has what’s called the GDP, which stands for Gross Domestic Product, and that is the entire market value of all the goods and services produced here within the United States.

The purpose of this is to measure the economic output of our country, to see if we’re growing as a society. If that number goes up, it tells us that incomes are increasing and spending is also increasing. Now, this is really important because alongside the GDP includes all the other revenue the country makes to keep itself running.

After all, roads need to be built, infrastructure needs to be made, police and firefighters got to get paid, the military needs funding, like buttons need to be smashed, and so on. A lot of those services, besides smashing like buttons, are paid through our tax dollars.

Just like with any business, there are gonna be times when tax revenue is not high enough to pay for all the services that we use and pay for. When that happens, we’ve got to get some of that D word, and this is the word that Dave Ramsey can’t stand. He hates this! That would be debt.

And that’s when the government begins borrowing money. Typically, this is done through issuing bonds and Treasury bills, which is basically just a fancy way of saying the government is going to pay you interest if you lend it some money, and that loan is guaranteed by the United States.

Which, let’s be real, the chances of the United States not paying off its debt on time as agreed is pretty much slim to none. It’s probably not gonna happen. So people see this type of loan as being a very, very safe investment.

But in terms of who actually buys and owns this debt, it’s actually really interesting, or honestly, it’s as interesting as I find it, and I’m weird. I find this stuff interesting! But hopefully, if you’re actually watching a video like this and you made it to this point in the video, you find it interesting too! So we’re both equally weird, so I don’t feel as strange about finding this interesting.

It's pretty interesting! Let me get into it. Anyway, 32% of the U.S. debt is owned by U.S. investors or it’s our very own citizens. This includes people like you and me who go and buy U.S. Treasuries, loan the government some money, and get paid back a little bit of interest.

Now, this is actually really good because this means its citizens are actually making the money, and the more money they make, hopefully, the more they will spend, and the more they’re gonna be circulating back into the economy, and everybody wins!

Next after that, 11% of the debt is owned by the Federal Reserve, and 27% is owned by the federal government, which basically means they’re just loaning money to themselves. Why, you might ask? Well, some government agencies actually make more money than they spend, so when that happens, they invest the extra money back into the government. They get paid some interest, and then if they ever need the money in the future, they could sell those bonds or Treasuries and get paid back.

Finally, 29% of our debt is held by foreign investors in other countries who want to invest within the United States because they see it as a very stable and safe guaranteed return.

Now, this is really important for me to mention up front because in order to understand how this national debt works, it’s important to clarify that this is not like some credit card out there with a 25 trillion dollar balance that needs to be paid down as soon as possible.

Otherwise you get a late fee, and like, it hurts your credit report, or you owe a whole bunch of interest. Because in a way, holding debt like this could actually be a good thing. I know it’s weird to say, but it can be a good thing!

Let me explain. In really simple terms, think of it like this: You have 1 million dollars, and you want to go and buy a 1 million dollar house. But a lender comes to you and says, “You know what? I’m gonna loan you 1 million dollars, and all you have to do in return, I’m just gonna want 1 percent in interest back annually.”

Now, you don’t have to pay off that debt at any time. You could keep that debt as long as you would like, but again, all I ask is just you pay me 1 percent annually. Pretty much anyone would take that deal!

Because they know if they take that million dollars instead, and don’t put it in a savings account earning 1.5 percent interest, they could just profit the difference by not paying down that loan. Or they could go and invest that extra 1 million dollars in the stock market to make an average return of 6% annually over the next 20 years.

They could do all sorts of stuff with an extra 1 million dollars that’s gonna make them way more money than the 1% in interest that they’re paying on that loan! Not to mention, if inflation is 2% annually and you’re only paying 1% in interest, then every single year that you hold that debt, that debt becomes cheaper and cheaper the longer you don’t pay it off.

Think about that for a second! If you’re paying 1% in interest but inflation is 2%, then that means every single year your outstanding loan balance is declining by 1 percent. You have less money in the future than you do right now!

Well, guess what? The same also applies to the national debt. With interest rates almost at zero percent, the United States is pretty much paying no interest on that 25 trillion dollars worth of debt. And when inflation is 2% annually, 25 trillion dollars becomes less and less intimidating every single year that they hold on to it.

So, in a way, even if we just kept to the same amount of debt that we have right now, in like a hundred years from now, that would be worth a fraction of what it is today.

In addition to that, the United States has a lot of value in terms of numbers here. It has 270 trillion dollars worth of assets and 150 trillion dollars worth of total outstanding debt, which means it has a net worth of over 123 trillion dollars.

The United States also owns one-third of the entire world's wealth as well—that's more than double the amount of the next runner-up! So, when you take a step back, you begin to realize that holding on to 25 trillion dollars worth of debt is not as bad as it seems when you look at the full picture.

It would be like if I said I’m 3 million dollars in debt, without me clarifying that the debt is on cash-producing rental properties, and that debt is mortgage debt at a really low interest rate, and the total asset value of all of those properties is 10 million dollars. In that context, the three million dollars is not so bad!

And it’s good! Our national debt is also measured against the GDP, which, like I mentioned earlier, is how much revenue our country produces. And as of last year in 2019, we had just over 21 trillion dollars of GDP, which at the time was about on par with how much national debt we had.

For all of you real estate people out there, it would be like if you received a thousand dollars a month in rent where your total overhead to hold that property is a thousand dollars a month. So, you aren’t making any money per se, but each and every year, your mortgage balance gets whittled down due to inflation, and you hope in the future you can increase rents to begin making some money.

The issue, however, comes down to you and I and this debt growing out of control. As you can see here, since 1966, the amount of debt we’ve been taking on, relative to how much money the country makes, has now started exceeding a hundred percent. Or in other words, the country is now spending more money than it makes.

So, with that, here are a few of the concerns that get brought up: One, if interest rates begin to rise, then the cost of holding on to all of that debt becomes more expensive. Right now, since interest rates are pretty much nothing, the United States owing about 25 trillion dollars is not that much of a concern.

If anything, it could actually be better to hold on to more debt with interest rates being so low than less debt with interest rates being really high. And that's just because with low rates, that debt is very inexpensive to keep. But if interest rates were to start going to, let's say, 4%, then holding that debt would end up costing a lot of money and start draining a lot of other funding from a whole bunch of other resources.

When the United States ends up needing more money, it’s probably gonna end up doing it through higher taxation. For example, after World War Two, the national debt skyrocketed because we had to fund the war. But because that debt increased so suddenly and unexpectedly, more than double the annual GDP, that had to be repaid back down. That was done through higher taxation.

So much so that in 1944, the top tax bracket for people making over $200,000 a year was 94 percent! Which just so you know, that would be the equivalent of earning 2.9 million dollars a year in today’s money.

But even still, imagine making almost 3 million dollars a year and then paying taxes and being left with a hundred and seventy-four thousand dollars!

So the main worry here is that we have this big ticking time bomb of debt that, when left unprovoked with low interest rates and mild inflation, is totally fine, it's harmless, and if anything, it helps our economy. But if interest rates go up and inflation goes down, then, yikes, where’s all that extra money to hold on to that debt going to come from?

And again, most likely, I think it’s gonna be through higher taxes. It would be kind of like you putting all of your money on a zero percent interest rate credit card that eighteen months from now is gonna charge you 20 percent in interest.

Well, for the first 18 months, you're totally fine. But as time goes on, eventually, that's going to have to be addressed. You’re gonna have to figure out a way to pay for it, and it’s probably going to be taxes.

Now, number two, the other concern is that maybe we just leave this be, we put it off, and we just leave it to another generation to worry about. Maybe they’ll be the ones to end up paying higher taxes, maybe they could be the ones to get less public infrastructure, or maybe they could just keep kicking the can down a little bit further and our future grandkids can deal with it.

That’s better. But the real issue, I think here, is probably a little bit more nuanced. Now, in terms of whether or not we should be worried about our national debt, the answer is probably not.

When we look at our debt in relation to how much money we make, we’re actually a lot lower than quite a few other countries. You can see here that sure we might owe the most amount of money, but we also make quite a lot of money as well.

And when we factor in how much money we make, look right there! Here we are, it’s like someone going and taking out a two million dollar mortgage. To most people, that would be crazy, until you realize that person is worth twenty million dollars.

Taking out a two million dollar loan is only 10% of their net worth. So, the amount of debt we’re taking on in relation to how much money we make is still relatively reasonable, and the amount of debt being taken on in relation to how much money is made is high, but it’s not the highest we’ve ever been.

Second, I think it’s safe to say it’s assumed that the plan with this debt is just to keep interest rates low and then let inflation do its thing. As long as our economy continues to grow and innovate, then that debt is just gonna be sitting there, slowly whittling away with inflation, assuming, of course, we don’t keep adding to it.

Really, because of that, there’s no reason to pay it down early. Why would they? There’s no incentive to do that? If anything, paying it off early could actually end up costing more money than just keeping it there, paying a very low interest rate, and just keeping up with mild inflation.

However, where I see the biggest obstacle is that if people stop investing in the United States, and if we stop growing as an economy, then at that point the United States might have to pay higher interest rates in order to entice people to lend the money.

And that in turn, I think would almost certainly mean higher taxes in the future. Think of it this way: If someone wants a pretty much guaranteed safe, stable return on their investment, they’re gonna be investing in the United States.

So, there’s a lot of demand for that type of investment, and that’s why the United States can get away with paying such little in interest because they know a lot of people will still invest in them.

But if our economy begins slowing down and other economies out there are beginning to ramp up, the risk is that other countries could be seen as a more stable, profitable return.

And when that happens, interest rates could begin to rise, and that debt could become a problem.

So all in all, here are my thoughts: Yes, the national debt is going up, yes, it is concerning, and yes, it can have some very serious repercussions.

But as of right now, it’s not a huge concern, although it can be if interest rates go up or the debt continues to grow higher and higher above our GDP.

However, this type of debt is necessary to continue reinvesting back into the infrastructure of our economy, and when you consider that the United States has operated on debt since 1789, you begin to realize that maybe it’s not as bad as it seems!

But it's certainly something to keep an eye on and be aware of, unless you don’t mind paying more in taxes in the future to help fund all of this debt that we’re accumulating.

Now, realistically, I think this is probably gonna be the most likely situation that happens. Just interest rates go up, taxes go up, and we take home less money because sometimes what could be borrowed today does end up taking away from tomorrow.

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