Should We Worry About Our National Debt?

In Ernest Hemingway’s novel The Sun Also Rises you will find a dialogue between two characters which goes like this – “How did you go bankrupt?” Bill asks to which Mike responds “Gradually, and then suddenly.”

The United States has spent three trillion dollars to support various government programs since the beginning of the pandemic. This will most likely push the debt-to-GDP ratio to 130% by 2025. To put these figures into perspective, the Unites States’ highest debt-to-GDP ratio was about 122% at the end of World War II. Since then, debt levels gradually fell ultimately hitting a historic 31.7% low in 1974.

The United Kingdom has not seen a recession like this for 300 years, as their economy nosedives more than 20 percent. In the United States, The Atlanta Fed is projecting Q2 GDP to drop a staggering 46.6% (official numbers to come out on July 30th).

Since all debt must be repaid, the federal government will be forced to extract more and more dollars from the economy to service it, leaving less for spending, investing and saving. Large Federal debt means less money to buy other things and when governments run large persistent deficits, it also has a devastating impact on economic growth overtime.

Some debt is good and necessary to promote economic growth and stability but when debt exceeds a certain threshold, as a percent of GDP, economic growth is reduced. Harvard economists warn that our current debt levels could reduce gross domestic product by over 25 % over the next 23 years.

While the debt may not present an immediate threat, there will come a day, when governments will struggle to provide essential services and be forced to raise taxes and cut spending. Each measure of debt is useful in understanding our nation’s fiscal condition. However, no matter the measurement, our debt is heading toward historic highs.

At the moment, the country’s top priority is to address the substantial health and economic damage caused by COVID- 19 (as it should be); however, once the crisis has abated, policymakers must also prepare to address the country’s unsustainable national debt.

Gradually and then suddenly might be one of the most profound insights into how things can go from bad to worse very quickly, before we can see or feel it.

Let’s just hope we can suddenly see it and gradually start to fix it.

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