The US federal debt has now exceeded $40 trillion … but what does that mean?
Human beings are barely equipped to conceive of a number that large. Let alone the complex implications that level of debt has for the future of American politics and prosperity.
But as always, there’s a deeper Moneyball truth at play here — and that’s what we’re talking about in today’s video.
Click below to get started:
Video Transcript:
Happy Friday, I’m Andrew Zatlin. Welcome to Moneyball Economics.
I’m going to share something I discussed on our sister channel earlier this week, Capital Gains Trader, and that is that the US public debt hit $40 trillion.
That’s the highest level it’s ever been, and it is rightfully raising a lot of concerns. For example, bond rating agencies could come out, lower our ratings, which raises our cost of borrowing and just basically makes us dig the hole even deeper. It also may weaken us on the world’s stage. I mean, imagine the following scenario. We’re out there hustling for $40 trillion today and tomorrow, every year, we’re having to borrow from some adversaries like China.
There’s a very real scenario out there where China could pause their lending and put us in a position of either A, having to raise our interest rates to incent other lenders to come to the table, or B, changing our position on things that are important to China like Taiwan.
It gives them leverage. Basically, our policies could be held hostage. And then there are other concerns like, are we debasing our currency? Are we an empire crumbling? And on and on and on.
These are big picture concerns that really, they don’t bother me.
Currency debasement, sure, but not really because all of our trading partners are doing the same thing. And I’m not worried about us being able to pay down our debt.
We’re not that family that’s maxed out credit cards and we’re one vacation or one jet ski purchase away from bankruptcy. But what does concern me is that we have indeed reached a tipping point where something’s got to give.
And President Trump recognizes that and spent a year and a half trying to adjust. But quite frankly, more things have to change. And I believe that there’s going to be pain out there. And the folks basically having to endure that pain are older and wealthier Americans.
To understand what’s going to happen, let me explain why we are where we are. First of all, we have a lot of debt and debt in and of itself is not a bad thing. Companies borrow all the time. They use financing to buy new equipment, expand manufacturing, and boom, their revenues grow.
The problem is that the US is doing the opposite.
We are borrowing and it’s not going into growth. The amount of money that we are borrowing is growing a lot faster than the budget is growing to pay it off. A couple reasons for that. Now, one of them is the cost of servicing that debt in and of itself is now huge.
You go back in time, say 10 years ago, the share of our budget that we spent paying off our debt was 6%. Not paying down the debt, just servicing the debt. 6% of our budget went to it. Today it’s almost 14, 15%. And it’s growing because interest rates are going up again.
So as a result, we got 14% of our budget that’s no longer available for things like highway infrastructure, education, and so on and so forth.
And then there’s the biggest place that we spend money, and that’s on social entitlements like Social Security, Medicare, Medicaid. Go back pre-Obamacare 20 years ago or so. And the share of the federal budget that went to these kinds of entitlements was 50%. Today, it’s 63% and growing. In other words, 10 years ago, about 50, 60% of the budget was earmarked for basically entitlements and paying down our debt, excuse me, servicing our debt. Today, we’re at 78%.
The amount of money available to manage America continues to go down as a share of the total budget. That’s problematic.
Now, Donald Trump came in, he’s a businessman, and he looked at this and he basically said, “Money coming in is not enough money going out. What can we do to change this picture?” He’s a businessman. He’s looking at this and he recognizes that while debt is debt is debt, there is bad debt and America has some bad debt and he’s trying to address that.
But first, he looked at the equation. How do we get to a place where we can free up money? Well, one way is you increase your revenues. And that’s what he spent the past year and a half trying to do. For example, with tariffs, what he’s trying to do is basically expand onshore manufacturing and grow the economy. He’s doing that in many different ways.
It may seem contradictory to, for example, lower the federal tax rates and put more money into the pockets of consumers. But again, what he’s trying to do is grow the GDP so that the amount of money in total, the nominal amount, it’s greater.
And it has been working, but it’s not the perfect solution. It’s not going to solve everything.
Instead, we have to look at what we are spending money on. And that’s where he started immediately. He fired 350,000 odd federal workers. He reduced federal spending through the doge type of analysis and so on and so forth.
He also started to look at programmatic entitlements like, for example, I mentioned Social Security. Well, he looked at something called the Food Stamp Program SNAP, about $120 billion program. This is just a handout and it’s not a good thing.
Remember, I mentioned there’s good debt and bad debt. This is bad debt. This isn’t money that’s going out to families who need eggs and milk and bread. Most of this money that goes out, the $120 billion, goes out for junk food, candy bars, potato chips, Coca-Cola. And because it’s so open-ended and free, the number of Americans who are getting it has just grown.
Go back about 10 years ago, about 9% of Americans were getting this money. Today, with 20 to 30% higher population, we also have 14% of Americans on this program. More Americans, bigger share. It’s a free ride, and Donald Trump has been pushing against it, creating what should be in there, which is installing some guardrails in terms of entitlements.
And as a result, almost overnight, 10% of the recipients have kind of disappeared because they shouldn’t be getting it. This is one example of going after entitlements. Another is looking at Social Security, which is huge. You paid into Social Security, you’re going to get money out.
However, there are about four, four and a half million Americans or more who have millions of dollars. And the argument out there right now is maybe they shouldn’t be getting Social Security. They may have paid into the system and are rightfully deserving of it, but they don’t need it.
And so some kind of means testing might be put in place.
This is how older and wealthier Americans are going to probably pay the price. As we look at a lot of these programs out there, you can grow your revenues as much as you want, but you also have to shrink your spending. And unfortunately, you can’t go after the young people. They don’t have the money, number one, and 30% of American wealth is with older Americans. And guess what? Younger Americans are starting to exercise their voting.
We’re seeing a generational shift. We’re seeing it with the DSA taking over New York City. There’s a reason why they went after those second homes. Young people are attacking the wealth of older people, and it’s not going to slow down or stop.
I don’t have a specific solution in mind. I’m simply painting the picture and helping you understand that going forward, there is a losing battle out there that’s going to be fought.
It’s going to take some time, but you can definitely understand that older and wealthier Americans are going to start seeing some taxes raising, some payouts going away, and so on and so forth.
We’re in it to win it.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics