Simmering on the back burner: the national debt

Sid Queler

October 11, 2021

The national debt of the United States is bigger than the American economy. 

As the musical Hamilton makes clear, the national debt of the United States has always been controversial. Treasury Secretary Alexander Hamilton created the original national debt of $80 million.1

“It will be a matter of choice, if we are not out of debt in twenty years, without at all encumbering the people,” he wrote to a colleague. “A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement of our Union.”2

More than two hundred years later, the US national debt is about $28.4 trillion.3

US national debt levels have fluctuated over time; however, during the past two decades, US debt has reached an extraordinary level, almost tripling from 2008 through 2019.4

$5.8 trillion. In 2008, prior to the financial crisis, the national debt was about 39% of gross domestic product (GDP), which is the value of all goods and services produced in the United States.4

$11.3 trillion. In 2012, following the financial crisis the national debt was 70% of GDP.4

$16.8 trillion. In 2019, higher government spending and lower government revenues pushed the national debt to about 79% of GDP.4

Then, COVID-19 arrived. The pandemic triggered the deepest downturn in economic productivity at the same time it necessitated significant government spending. As a result, the national debt is expected to be about 102% of GDP at the end of 2021.To put it another way, by the end of this year the US national debt will be larger than the US economy.

High levels of national debt are not sustainable over the long term

High levels of national debt can have myriad effects, many of which are undesirable. These include: 

  • Slower economic growth. Researchers at the World Bank identified a “tipping point” at which a nation’s debt can slow its economic growth. The report stated, “The estimations establish a threshold of 77% public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth.” 
  • Higher borrowing costs. As a general rule, the higher a country’s debt level, the higher its debt payments. In the United States, our debt is financed through Treasury notes and bonds. When interest rates rise, any new debt will be issued at higher rates. If we issue too much debt, it’s possible that confidence in US Treasuries as a safe haven could decline. 

According to Federal Reserve Chair Jerome Powell, the national debt is not the top priority of government today, but it will need to be addressed at some point. In April 2021, he stated: 

“…over time and in the longer run, the US federal budget is on an unsustainable path, meaning simply that the debt is growing meaningfully faster than the economy, and that’s by definition unsustainable over time. It’s a different thing to say that the current level of the debt is unsustainable. It’s not. The current level of the debt is very sustainable, and there’s no question of our ability to service and issue that debt for the foreseeable future. As a nation, we will have to eventually get back to a sustainable path. That is something that is best done in very good times, when the economy’s at full employment and when taxes are rolling in. This is not the time to prioritize that concern, but it is nonetheless an important concern…”7

Investors should be aware of the national debt

The US national debt is an issue that needs to be monitored and addressed before it becomes a crisis. However, we think that point is further down the road as long as the following continue:

  • The economy grows at a faster pace than the interest rate on the debt. 
  • Our yields are higher than the bond yields of other developed countries and the dollar is the reserve currency for the world.  

We have been asked what investors should do to protect their portfolios against rising national debt levels. Right now, the answer is very little. The national debt is a backburner issue for the economy. There are more dominant factors driving markets like the pandemic, corporate profits and easy money from the Federal Reserve. So far, the right call for investment strategy has been to ignore the debt.

Going forward, the best approach is to watch the bond market for signals that demand for US Treasury debt is waning. This could be a leading indicator that interest rates on US national debt will need to rise, creating a cycle of rising interest on the debt that leads to issuance of more debt. The first big test will be when the Fed—currently the largest buyer of Treasuries—begins to “taper” its purchases. Current expectations are that tapering will begin this year or early next year.

Historically, governments have reacted to debt-driven economic weakness by enacting inflationary policies, which jump start the economy and to shrink the “real” value of the debt that must be repaid to bondholders. Consequently, a current theme in our asset allocation recommendations is having long-term inflation protection in your portfolio, such as allocations to commodities and/or floating-rate debt.  More generally, we have underweighted government debt in portfolios as unattractive yields make their returns relative to the potential risk down the road unattractive.

To learn more about the issues surrounding US national debt and how you can best position your portfolio if our country experiences it, contact or 617.531.6954.

Sidney F. Queler is the chief growth officer of CIBC Private Wealth, US. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also serves as a member of the CIBC Private Wealth US Operating Committee and as a member of the advisory team for the firm's Boston office. In addition to leading national business development, he remains actively involved with client relationships. 

1 “How Alexander Hamilton Tackled the National Debt,” Smithsonian Magazine, April 19, 2017.
2 Alexander Hamilton to Robert Morris, April 30, 1781, Founder’s Online.
3 “Historical Debt Outstanding - Annual 2000 – 2021,” Treasury Direct, October 4, 2021.
4 “Federal Debt: A Primer,” Congressional Budget Office, March 12, 2020. [Choose pdf or html and data underlying the figures]
5 “The 2021 Long-Term Budget Outlook,” Congressional Budget Office, March 2021.
 6 Thomas Grennes, Mehmet Caner, Fritzi Koehler-Geib, “Finding The Tipping Point -- When Sovereign Debt Turns Bad,” World Bank Group, June 22, 2013.
7  Jerome Powell, “Speech at The Economic Club of Washington D.C.,” April 14, 2021.