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 wiring statistic is not the absolute
value rather 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 and 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 so 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 like us a country has income and it
has expenses and 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 treasur
treasury promises to pay them back plus
interest at some stage in the future and
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 and lastly
another interesting thing to mention is
that the US Federal Reserve which is
America's Central Bank can also buy
treasury bonds and 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 trademark pending into the
hands of the government so that's how a
country goes into debt and then the next
thing to understand is well what on
Earth is going on in the United States
well remember the main reason a country
goes into debt is because 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 so 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 that year 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 bye 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 now 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 and 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 so 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 99.4%
from corporate tax and 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 14% on Medicare
133% on interest payments for their debt
133% on Health 133% 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 and this worsening of the
deficit overtime is predicted to swell
the US debt 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 and their main job is
to raise and lower 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 1 half% 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 bond holder 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 and 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 which
makes 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 spent $601 billion just on
interest payments and 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 and as you can see with
mandatory costs Rising this is going to
greatly reduce the amount of
discretionary spending that 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
24.3 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 you know
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 own is
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 and that's a good
thing if productivity Rises then
businesses and workers earn more which
leads to higher incomes and more tax
revenue low lower borrowing costs also
means there's more investment which
causes asset prices to rise and
generally the inflation rate will pick
up too and 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 price
and median salary 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 and 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 that when you do
employ these stimulative measures to
start encouraging
inflation well you get inflation and 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 and 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 and 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 and that's why the Federal
Reserve targets a 2% inflation rate as
opposed to zero it keeps the economy
pushing forward it keeps prices going up
steadily over time keeps wages Rising
steadily over time it encourages
spending sooner which grows the economy
and the big long-term benefit from a
debt perspective is that slowly but
surely devalues the currency making debt
repayments from y to year easier and
easier so overall that's the process of
how the government 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 and 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 Deb 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 dollar or 35.2% of
GDP and you know 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
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please check out stock market Investing
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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
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