Ok, let’s talk about the giant elephant 🐘 in the room. The national debt is upwards of $36 trillion, according to the U.S. Treasury, a fact that has fueled concerns among some investors and economists. This means that the federal debt has nearly quadrupled since before the 2008 global financial crisis, and has grown every year since 2001. This adds to the recurring fiscal debates over budget deficits, the debt ceiling, government shutdowns, stimulus bills, and more.
With the election now behind us, attention has shifted to the next administration’s cabinet nominations and policy proposals. The large and ever-growing national debt will only rise in importance, including the complex ways it impacts the economy and markets.
Yes, our government spends like drunken sailors. And if you or I managed our personal finances like the government, we’d be bankrupt and no bank on the planet would touch us. But alas, the government is not us – they play by a different set of rules. So, how can we put this government spending and national debt in perspective and stay focused on what drives markets in the long run?
The national debt has grown rapidly since 2008
When it comes to challenging issues like the national debt, it’s important to distinguish between what matters as citizens, voters and taxpayers, and what should matter as investors. As individuals, many rightly have strong personal and political views on government spending and taxation, and what it may mean for the country over the coming generations. This will likely hit headlines again when the debt ceiling, which is the maximum amount of debt the federal government is allowed to borrow, becomes a key issue when it’s reinstated in January 2025.
These concerns should be distinguished from whether the federal debt directly or indirectly impacts the economy and markets. Without diminishing the importance of the national debt, we need to keep in mind that markets have generated strong returns over the past two economic cycles. Investors should avoid overreacting with their portfolios at the expense of their long-term financial plans.
The size of the national debt relative to the size of the economy provides a clearer picture than the dollar amount of debt alone. There is no getting around the fact that the national debt has grown significantly, but the economy has also doubled since 2008.
Specifically, the national debt now represents 120% of GDP. However, this includes debt the government owes to itself, i.e., Treasuries held by government agencies. Excluding these, the government debt is 95% of GDP. This is still sizable and the latest jump is due primarily to pandemic-era stimulus.
It’s unclear where the limits of this borrowing are. Japan is the typical example of a developed country with a high debt burden that has exceeded 200% of GDP over the past 15 years, and over 250% since 2020. However, Japan’s situation is not directly comparable since it has a much bigger household savings rate, which helps to offset its significant government debt. Additionally, the U.S. economy is more diverse, demographic trends are much more favorable, and the dollar plays a far more important role in the global economy.
Large budget deficits each year have driven up the national debt
How has the federal debt increased so quickly? In two words, budget deficits. Budget deficits occur when the government spends more than it collects in taxes, which adds to the total debt. Taxes here include individual and corporate taxes, as well as social insurance taxes, such as those that fund Social Security, excise taxes, and others. The government also generates revenue from sources such as tariffs, but these are small by comparison, making up 2% or less of total government revenue each year.
Even though tax revenues tend to increase as the economy grows (even without raising tax rates), they have been outpaced by government spending over time. These expenditures have grown across what are known as “mandatory” programs such as Social Security and Medicare as well as so-called “discretionary” items such as defense and education.
The shortfall is funded by government borrowing, i.e., by issuing Treasury securities. Investors, institutions, and other countries buy these Treasuries and, in effect, fund the federal government.
The current deficit of around 6% of GDP is by no means small, but there have been many periods across history – primarily during economic downturns and wars – when the government has been forced to spend at these levels. History shows that, over time, deficits improve as the economy stabilizes, even if they don’t turn into surpluses.
The debt burden will only grow as interest payments rise
The unfortunate reality is that deficit spending does not seem to be going away, with neither major party focusing on the issue. The last balanced budgets occurred during the Clinton years and the Nixon administration before that. The accompanying chart shows that left unchecked, government projections suggest that interest payments on the debt alone could rise to $1.71 trillion in ten years.
About two-thirds of the national debt is held either by the government itself or by U.S. citizens. Other countries hold the rest with China owning about 2.2% of the U.S. government debt, although this proportion has declined. Many investors worry that growing debt levels means that Treasuries could be less attractive in the future. In the extreme, this could hamper the government’s ability to roll its debt, possibly leading to skyrocketing interest rates, or weaken the dollar’s standing as the world’s reserve currency. Ultimately, many worry that the U.S. could lose its position in the global economy.
While this is possible, it does not seem likely, even with increased enthusiasm for dollar alternatives such as cryptocurrencies and gold. In fact, this has been a concern among economists for many decades. And yet, when the global economy faces distress, investors and governments still turn to the U.S. as a safe haven. In 2011, for instance, when Standard & Poor’s downgraded the U.S. debt during the fiscal cliff standoff, investors didn’t sell their Treasuries – they rushed to buy more. Counterintuitively, this is because U.S. debt securities are still the standard for stable, risk-free assets in the world, despite these challenges.
Finally, and perhaps most importantly, markets have done well regardless of the exact level of the government debt and taxes over the past century. Ironically, the best time to invest over the past two decades has been when the deficit has been the worst. These periods represent times of economic crisis when the government is engaging in emergency spending, which tends to coincide with the worst points of the market. And while this isn’t exactly a robust investment strategy, it does underscore the importance of not over-reacting to fiscal policy in one’s portfolio.
The bottom line? The federal debt is a complex and controversial topic. As with many heated issues, it’s important for investors to separate their personal concerns and not react with their hard-earned savings or investments.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
$36 Trillion National Debt! | Should You Worry?
Ok, let’s talk about the giant elephant 🐘 in the room. The national debt is upwards of $36 trillion, according to the U.S. Treasury, a fact that has fueled concerns among some investors and economists. This means that the federal debt has nearly quadrupled since before the 2008 global financial crisis, and has grown every year since 2001. This adds to the recurring fiscal debates over budget deficits, the debt ceiling, government shutdowns, stimulus bills, and more.
With the election now behind us, attention has shifted to the next administration’s cabinet nominations and policy proposals. The large and ever-growing national debt will only rise in importance, including the complex ways it impacts the economy and markets.
Yes, our government spends like drunken sailors. And if you or I managed our personal finances like the government, we’d be bankrupt and no bank on the planet would touch us. But alas, the government is not us – they play by a different set of rules. So, how can we put this government spending and national debt in perspective and stay focused on what drives markets in the long run?
The national debt has grown rapidly since 2008
When it comes to challenging issues like the national debt, it’s important to distinguish between what matters as citizens, voters and taxpayers, and what should matter as investors. As individuals, many rightly have strong personal and political views on government spending and taxation, and what it may mean for the country over the coming generations. This will likely hit headlines again when the debt ceiling, which is the maximum amount of debt the federal government is allowed to borrow, becomes a key issue when it’s reinstated in January 2025.
These concerns should be distinguished from whether the federal debt directly or indirectly impacts the economy and markets. Without diminishing the importance of the national debt, we need to keep in mind that markets have generated strong returns over the past two economic cycles. Investors should avoid overreacting with their portfolios at the expense of their long-term financial plans.
The size of the national debt relative to the size of the economy provides a clearer picture than the dollar amount of debt alone. There is no getting around the fact that the national debt has grown significantly, but the economy has also doubled since 2008.
Specifically, the national debt now represents 120% of GDP. However, this includes debt the government owes to itself, i.e., Treasuries held by government agencies. Excluding these, the government debt is 95% of GDP. This is still sizable and the latest jump is due primarily to pandemic-era stimulus.
It’s unclear where the limits of this borrowing are. Japan is the typical example of a developed country with a high debt burden that has exceeded 200% of GDP over the past 15 years, and over 250% since 2020. However, Japan’s situation is not directly comparable since it has a much bigger household savings rate, which helps to offset its significant government debt. Additionally, the U.S. economy is more diverse, demographic trends are much more favorable, and the dollar plays a far more important role in the global economy.
Large budget deficits each year have driven up the national debt
How has the federal debt increased so quickly? In two words, budget deficits. Budget deficits occur when the government spends more than it collects in taxes, which adds to the total debt. Taxes here include individual and corporate taxes, as well as social insurance taxes, such as those that fund Social Security, excise taxes, and others. The government also generates revenue from sources such as tariffs, but these are small by comparison, making up 2% or less of total government revenue each year.
Even though tax revenues tend to increase as the economy grows (even without raising tax rates), they have been outpaced by government spending over time. These expenditures have grown across what are known as “mandatory” programs such as Social Security and Medicare as well as so-called “discretionary” items such as defense and education.
The shortfall is funded by government borrowing, i.e., by issuing Treasury securities. Investors, institutions, and other countries buy these Treasuries and, in effect, fund the federal government.
The current deficit of around 6% of GDP is by no means small, but there have been many periods across history – primarily during economic downturns and wars – when the government has been forced to spend at these levels. History shows that, over time, deficits improve as the economy stabilizes, even if they don’t turn into surpluses.
The debt burden will only grow as interest payments rise
The unfortunate reality is that deficit spending does not seem to be going away, with neither major party focusing on the issue. The last balanced budgets occurred during the Clinton years and the Nixon administration before that. The accompanying chart shows that left unchecked, government projections suggest that interest payments on the debt alone could rise to $1.71 trillion in ten years.
About two-thirds of the national debt is held either by the government itself or by U.S. citizens. Other countries hold the rest with China owning about 2.2% of the U.S. government debt, although this proportion has declined. Many investors worry that growing debt levels means that Treasuries could be less attractive in the future. In the extreme, this could hamper the government’s ability to roll its debt, possibly leading to skyrocketing interest rates, or weaken the dollar’s standing as the world’s reserve currency. Ultimately, many worry that the U.S. could lose its position in the global economy.
While this is possible, it does not seem likely, even with increased enthusiasm for dollar alternatives such as cryptocurrencies and gold. In fact, this has been a concern among economists for many decades. And yet, when the global economy faces distress, investors and governments still turn to the U.S. as a safe haven. In 2011, for instance, when Standard & Poor’s downgraded the U.S. debt during the fiscal cliff standoff, investors didn’t sell their Treasuries – they rushed to buy more. Counterintuitively, this is because U.S. debt securities are still the standard for stable, risk-free assets in the world, despite these challenges.
Finally, and perhaps most importantly, markets have done well regardless of the exact level of the government debt and taxes over the past century. Ironically, the best time to invest over the past two decades has been when the deficit has been the worst. These periods represent times of economic crisis when the government is engaging in emergency spending, which tends to coincide with the worst points of the market. And while this isn’t exactly a robust investment strategy, it does underscore the importance of not over-reacting to fiscal policy in one’s portfolio.
The bottom line? The federal debt is a complex and controversial topic. As with many heated issues, it’s important for investors to separate their personal concerns and not react with their hard-earned savings or investments.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Recent Posts
Missing Just ONE Day in the Market Can Derail Your Year [Video]
Debt, Deficits, and the Moody’s Downgrade
Last Week on Wall Street: U.S.-China Tariff Truce? [May. 19-2025]
Subscribe to Our Blog
Shareholder | Chief Investment Officer