After America's stunning upset of the British in the Revolutionary War, you may think there was a time of relative peace and agreement among the new nation. Unfortunately, that would be an incorrect assumption. One of George Washington's first challenges was ensuring unity among the colonies after the war. America borrowed big to wage war against Britain, and the French and Dutch wanted to be repaid. At the time, there was great debate over how the newly formed United States should work. How united should they exist financially? Should states be allowed to borrow independently, or should only the federal government be allowed to borrow? If the states split, how would the already accrued debt be divided? Dealing with debt is as American as apple pie, and with Big, Beautiful Bills in the headlines, it would be good to understand how it impacts us as investors and Americans.
Debt is a way of life in modern-day global economies. It's common for people to argue that we would be better off if we were on a gold standard or some other currency standard. Frankly, it's not a question of whether it is better or worse, but one of relative advantages. We have been on the gold standard before; many countries have tied their currency to a physical reserve, which also has challenges. If Alexander Hamilton were alive today, he would likely be thrilled to see how the global economy is tied to central banks that issue debt to a pool of private borrowers. Having debt is not necessarily the problem. What we are spending our money on and what interest we are borrowing will ultimately be the problem.
Governments are measured as a percentage of debt to their gross domestic product. The strength of a nation's currency and the attractiveness of its debt are based on that ratio. All developed nations borrow big amounts relative to their GDP - as long as your country is near its peers in borrowing, it probably is not a huge issue. A bigger problem is the cost of servicing the debt. As you know, when rates are higher, more of your mortgage payment is interest, and less is principal. The same applies to the government - when rates are higher, borrowing and having debt costs more. We should be watching our net interest payment. At some point, no one knows where; this net interest payment (as a percentage of our budget) will force the government to stop running deficits. Until then, the arguments in DC will be centered on what we spend our money on rather than balancing a budget or reducing the debt.
Unfortunately, the national debt is misunderstood and talked about unproductively. When someone wants to talk about the debt, I almost always ask them if they know the annual federal budget, plus or minus a trillion dollars. I've never had someone correctly answer (it's 7 trillion dollars, by the way). Of that 7 trillion, over half goes to social security/medicare/medicaid. No politician will be re-elected running on a platform of taking away money from Americans. The annual budget, deficit, and national debt are complicated ideas representing our collective and individual interests in the global economy. A fundamental reality is that we have always had and will likely always have debt. There is no silver bullet, but a good starting point is discussing how it works in the broader context of economic trade-offs and how it impacts us as investors and Americans.