U.S. Debt Surpasses $40 Trillion: A New Milestone

Another dubious milestone for the U.S. debt, and with it, a renewed concern over what it means for our financial future.

We get lots of questions and concerns in the client meeting room, and I believe few are as important as what impact will the U.S. debt have on our financial future.

Debt Growth Timeline: From $20 Trillion to $40 Trillion

The U.S. government debt surpassed $40 trillion for the first time on August 18th, just 4 and a half years after it hit $30 trillion for the first time. It hit $20 trillion less than 9 years ago, meaning the debt has doubled in less than a decade.

LPL tells us it’s been 25 years since the U.S. government has run at a surplus, meaning we’ve added to the debt, every year for a quarter century.

Debt-to-GDP Ratio and Interest Rate Pressure

The government pays its debt with Treasury bonds, and the recent increase in interest rates has further intensified the deficit. While the $40 trillion number is the headline number, economists focus more on the debt-to-GDP ratio. In other words, comparing how much debt the government has to the amount economic production of the country. That number is 123%, near an all-time high.

This chart shows that. The ratio of debt to GDP took a monster leap during the War on Terror at the beginning of the century, and reached an all-time high during the COVID pandemic.

While it has dropped since, it’s drifting upward.

Treasury Bond Buyback and 30-Year Yield

The Treasury has recently announced a $4 trillion dollar buyback of longer-dated bonds after the 30-year yield topped 5% recently, which was the highest since 2007. Not a good year to reference.

How Should Investors Respond to Rising Debt

So how should investors respond? Well, first, history tells us stocks and bonds have fared well despite a widening deficit. It is typically something else that creates a downturn, like the 2008 financial crisis, or COVID. So, the headline of $40 trillion is not, in itself, a reason to panic.

Spending, Tax Increases, and Controlling What We Can Control

The most worrisome part is that nothing is being done to curtail spending. Neither party is doing much about it. It’s unlikely we grow ourselves out of the current Debt-to-GDP ratio. That leaves tax increases as the most likely lever that is pulled.

It’s not the answer that we really want to have, but we have to focus on controlling what we can control. First Trust Chief Economist Brian Wesbury once said if I told you we were going to play a baseball game, and for the first 6 innings we would play by the rules of baseball that you know, but in the 7th inning I was going to change the rules, but you don’t know how I’m going to change them, would it change how you chose to play the first 6 innings. Of course, it wouldn’t. He was talking about the U.S. debt. It could change the rules, but we can’t know how. So, all we can do is play the game by the rules we know.

Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.