U.S. Debt: The Elephant in the Room That Keeps Growing

Congress - erick4x4 for Getty images
Credit: erick4x4 for Getty images

Back in February, when the Trump administration released its budget for this year, I wrote a piece titled "The U.S. Economy's Elephant in the Room." The elephant referred to back then was the national debt, and I expressed concern that it was around $23 trillion. At the time, that equated to just over 100% of GDP.

That seems kind of quaint now, given that the elephant in the room isn't just a large nuisance -- it's outgrown the room itself. U.S. debt-to-GDP, at the end of Q2, just a couple of months later, was over $27 trillion, a massive 135.64% of GDP, according to the St. Louis Fed.  And, given the massive drop in GDP and increased spending that came as a result of Covid-19, it is probable that that is getting bigger every day.

Still, you might say, other countries have higher debt to GDP ratios and there hasn’t been any dire consequences for America yet from over $27 trillion of debt, so why worry?

The first part of that statement is definitely true, but I’m not sure that the countries with higher debt to GDP ratios than the U.S. are ones that should be held up as role models. There are countries like Greece and Portugal, of course, whose debt levels threatened the global financial system for a while a decade or so ago, and where measures necessary to stave off collapse caused pain and hardship. Among developed nations though, the undisputed debt leader is Japan, where increasing debt has been used as a tool to fight a stagnant economy for decades, leading to a debt to GDP ratio of 267%. Here is the result of that effort:

Japan GDP growth

Figure 1: Japan GDP Growth. Source:

Some claim that such massive levels of government borrowing actually cause hard times and even recessions, but, according to research from the non-partisan Economic Policy Institute (EPI), that is more correlation than causation and cannot be proven. However, based on the chart above it is pretty clear that borrowing massive amounts of money and throwing it at the economy doesn’t solve the problem of shrinking GDP growth.

If it doesn’t actively do harm, then was Dick Cheney right when he said that "deficits don’t matter"?

In the short-term, yes, but that short-termism is part of the problem.

Ever increasing deficits -- and therefore debt -- is a gamble by politicians. They are all too aware that should interest rates rise, repaying the debt will become a major issue. If the U.S. were to default, it would risk complete collapse of the financial system. If that were to happen, the resulting recession that would make 2009 look like a boom.

However, they are also aware that the average voter doesn’t understand the issue and looks only at the here and now, and that by the time the big crash comes, they will probably be dead or at least retired and wealthy enough to not be hit too hard themselves. There is even a chance that financial Armageddon will come under the other party and destroy them electorally for decades, which many would see as a positive. It is easy to see why it is a temping gamble to take.

There was a time when this was considered a partisan issue. Democrats were seen as the party of big spending and fiscal irresponsibility for decades, but those times are far behind us. The Cheney quote above reads in full that "Reagan showed us that deficits don’t matter."

It is clear the disregard for fiscal responsibility among Republicans in power dates at least back to the 80s, no matter what they may say when they are in opposition. Democrats usually don’t even pretend to care whether in power or opposition. Right now, for example, with over $27 trillion in debt, they are campaigning for ever bigger stimulus bills. Obviously, we need some relief given the pandemic-caused mess we are in, but does it always have to be the maximum possible amount?

The money goes to different places under different parties and debt can be grown by tax cuts or spending -- or both as it is now -- but that debt grows either way.

I don’t want to preach when I bring this up, nor do I want to sound like I am predicting imminent devastation. It is election season after all, so there is enough of both of those things going around. But ignoring it on the basis that it isn’t a problem right now is foolish in the extreme. Yes, government debt is not household debt, and yes, the repayment rules and options are different, but whether you just print money, raise taxes, cut spending, or any combination of the above, massive debt does long-term harm to the economy eventually. The longer it is ignored, the greater that harm will be.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio