Whether you're an overeducated dumbass or a high school dropout, there's a good chance the dollar numbers surrounding the U.S. debt can be confusing.
Make no mistake, Uncle Sam's $35 trillion in outstanding debt (yes, that trillion with a “T”) seems like a huge number. Also consider that the total amount in 2020 was “only” $27 trillion. fear of debt feel that's right. And the tax cuts promised by President Trump are certain to materialize. Yeah!
But it's also true that pundits and politicians are saying – are we screaming this? – For many years.
This may be the most controversial claim I've ever made in this column, but I'm not afraid. And more importantly, neither should you. Because when you actually crunch the numbers, Uncle Sam actually few It's not more debt than the past few years.
If that sounds off-putting, and you can't blame me for being a skeptic after all this noise, let me explain.
The important thing to understand here is that U.S. government bonds are issued in U.S. dollars. Another important thing to understand is that the value of these dollars has shrunk significantly thanks to the multi-year tsunami of inflation caused by the pandemic.
As a result, the real cost of US debt servicing has also fallen significantly. Since COVID-19, the official inflation rate has increased by a full 20%. But you and I both know that it was actually more than that, maybe 30%. So the $27 trillion in 2020 is probably $6-8 trillion smaller in real terms.
Honey, they reduced their debt! In other words, inflation is our enemy, but it is always Uncle Sam's friend.
As I have detailed in multiple past columns, such as this article, excessive money creation by central banks causes subsequent inflation, which is ultimately followed by higher wages. Excess money creation, then inflation, then rising wages. Always, always, always.
Further after that, the uncle's nominal income increases, but it is increased by more, but devalued, taxes.
Have you ever wondered why the Federal Reserve wants 2% inflation? Why not zero? Well, 2% may seem small, but it will be very helpful in managing your uncle's debt. simple arithmetic. In 2024, debt could increase by about $1.5 trillion and reach up to $1.7 trillion. But with 2% inflation, the $35 trillion real debt in 2024 would be reduced by $700 billion in real after-inflation value, offsetting almost half of the $1.5 trillion… functionally evaporated!
And the rest? GDP is $29 trillion. With 2% inflation and 2.5% real economic growth, GDP would grow by 4.5%, or $1.3 trillion. In addition to the $700 billion in inflation benefits, Uncle Sam has recouped about $250 billion of that through higher income taxes. For example, if we subtract these two numbers from the $1.7 trillion high end of the projected U.S. debt increase, we are left with $550 billion in new debt.
We have been discussing my uncle's “total debt.” It hardly matters. Part of the reason is that since 2021, $1.3 trillion of the company's new debt has been issued to its own agents, either as a piggy bank or as a loan to a spouse. It's tame. No net interest is paid and no one is being foreclosed on.
What matters is the so-called “net debt” that the uncle owes to people other than him. Taking this into account, all but at most $250 billion of the amounts remaining above would be erased.
Uncle's income has naturally started to catch up with inflation since 2020. This will keep Uncle's debt service costs relative to earnings below all-time highs and on par with or lower than they were in the 1980s. fact. It was fine at that time. It's okay now.
Another fact: If we were indeed approaching a true debt crisis, long-term interest rates would already be probably double what they are now…or nosebleed high. Bond market prices are reality, not exaggeration. How stupid do you think long-term financiers really are?
More debt is not desirable. What's really bad is that government spending is increasing as a percentage of GDP, which means we have more vampires on our backs. As we learned from Milton Friedman in the 1960s, when your uncle spends money…we pay for it one way or another, either through higher taxes or inflation, or both.
Therefore, there is no need to scare people with debt phobia for now. Uncle Sweat's expenses. Don't worry about debt.
Honey, they scaled it down.
Ken Fisher is the founder and executive chairman of Fisher Investments, a New York Times bestselling author, and a regular columnist in 21 countries around the world.
