Whether you’re an overeducated idiot or a high school dropout, chances are your mind is boggled by the dollar figures surrounding America’s debt.
There’s no doubt that Uncle Sam’s outstanding debt of $35 trillion – yes, that’s $1 trillion, with a “T” – seems like a very, very high number. Also consider that in 2020 the total was “only” $27 trillion. Debt Fears feel so it’s true. And Trump’s promised tax cuts are ahead of schedule. Eek!
But it is also true that pundits and politicians have been saying this – shouting this? – for many, many years.
This may be the most controversial statement I’ve made in this column, but I’m not afraid — and more importantly, you shouldn’t be either. Indeed, when the numbers are compared in real terms, Uncle Sam actually has less debt than in past years, no more.
If that sounds absurd to you – and with all the noise, you certainly can’t blame someone for being skeptical – let me explain it to you.
The key point to understand here is that US debt is issued in US dollars. The other key thing to understand is that the value of these dollars has declined significantly, thanks to a multi-year pandemic-induced tidal wave of inflation.
Result: the real costs of repaying American debt have also decreased considerably. Since COVID, official inflation has increased by 20%. But you and I know it was actually more than that – maybe 30%. So the 2020 $27 trillion was reduced in terms of actual repayment by maybe $6-8 trillion.
Honey, they reduced the debt! In other words, inflation is your enemy, but it is still Uncle Sam’s friend.
As I have detailed in several columns like this one: excessive central bank money creation triggers subsequent inflation, which is ultimately followed by wage growth. Excessive money creation, then inflation, then wage growth. Always, always, always.
Later still, the uncle’s nominal income increases – thanks to the higher but devalued taxpayers’ money.
Have you ever wondered why the Federal Reserve wants 2% inflation? Why not zero? Well, 2% seems small, but it really helps with my uncle’s debt. Simple arithmetic. By 2024, the debt will increase by about $1.5 trillion, perhaps a maximum of $1.7 trillion. But 2% inflation reduces the $35,000 billion in 2024 debt by $700 billion in real value after inflation, thus offsetting nearly half of the $1,500 billion… Functionally vaporized!
And the rest? GDP is $29 trillion. With inflation of 2% and real economic growth of 2.5%, GDP increases by 4.5%, or $1.3 trillion. Uncle Sam, in addition to the 700 billion dollars in benefits linked to inflation, recovers about 250 billion in increased income taxes. Subtract those two numbers from, say, the high estimate of U.S. debt growth of $1.7 trillion, and that leaves $550 billion in new debt.
We discussed my uncle’s “total debt.” It hardly matters. This is partly because since 2021, $1.3 trillion of its newly created debt has been issued to its own agencies, much like their piggy banks, or like you lend to your spouse. No net interest paid and no one to seize.
What matters is what is called the “net debt” owed by the uncle to people outside the uncle. Accounting for this eliminates all but $250 billion, at most, of what remained above.
We’re at the beginning of our uncle’s income naturally catching up with post-2020 inflation. This will keep Uncle’s debt servicing costs relative to his income below historic highs, at or below the level of the 1980s. Done. We were fine at that time. Everything will be fine now.
Another fact: if we were actually getting closer to a full-blown debt crisis, long-term interest rates might already be twice as high as they are now… or even higher. The bond market values reality, not hyperbole. How stupid do you think long-term lenders really are?
More debt is not desirable. What’s really bad is that government spending is increasing as a percentage of GDP – the vampire growing on our backs. As I learned from Milton Friedman in the 1960s, if Uncle spends money…we pay for it, one way or another, through higher tax rates or inflation , or both.
So, for now, don’t let the debt phobics scare you. Sweat my uncle’s expenses. Don’t worry about debt.
Honey, they shrunk it.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author and a regular columnist in 21 countries around the world.
