Hal Masover | Sep 17 2025 15:00
How Do We Make Sense Out Of the $37 Trillion National Debt?
“Ronald Reagan proved that deficits don’t matter.” Dick Cheney, American businessman & former vice president of the United States
“The debt crisis could cause an “economic heart attack.”” Ray Dalio, founder and former CEO of Bridgewater
“It doesn’t mean a short-term crisis, but it does mean we’re going to be poorer in the long term.” David Kelly, chief strategist at JP Morgan
It can get very confusing discussing the US national debt, and that’s easy to understand. I’m not sure mere mortals are capable of understanding what nearly $37 trillion dollars is. And it’s growing by almost $2 trillion a year. It’s hard to even write these figures without wanting to turn into Chicken Little and run around yelling about the sky falling.
And yet, it isn’t. And no one can tell you if it will fall tomorrow, or never. So how do we make any sense out of this at all?
The United States is a bit like someone we all know or hear about. Someone that bought a really nice car, nice house, belonged to the best country club, basically lived high. It all looked great, and we wished we could live like that, until we understood that it was all borrowed money. They kept being able to borrow because they had a good credit score and paid their bills on time, but all those loan payments left very little margin for error. A brief slowdown in their income could cause the whole thing to come crashing down, and often it did, especially in recessions.
So, we think the United States is in for the same fate, and it seems a bit unreal and unnerving that they keep on being able to borrow ever higher and higher amounts with no threat of impending doom. How is that possible?
The answer is actually surprising. The US funds its debt by selling US Treasuries. Each US Treasury bond or note is a loan to the US Government. The US Treasury market is the most liquid market in the world and despite the seriously scary numbers, it’s good business to lend money to the federal government.
The proof of that is that every bond or note that the United States Treasury sells has more than 2 ½ bidders. In other words, despite the seemingly enormous supply of US Treasuries, there’s actually not enough to satisfy demand.
Who are these buyers? Well, you may actually be one of them – indirectly. If you have a bank account, especially one that pays interest, your bank is able to pay you interest because they invest the money you deposit with them. And a lot of those investments are in US Treasuries. The largest holder of US Treasuries is the Federal Reserve. The 2nd largest holder is mutual funds and hedge funds. Banks and insurance companies are also on the list of largest buyers of treasuries.
Despite headlines, usually soundbites from politicians, foreigners don’t own most of our debt. Approximately 88% of our debt is owned domestically.
The US has never defaulted on their debt. Ever. Not even when we were a poor emerging nation. And it’s extremely unlikely we will default anytime in the lifetime of everyone reading this. The reason is simple.
Go back to your friend who borrowed so much that the slightest hiccup caused it all to come tumbling down. The reason everything fell apart was that your friend’s income stream fell below his or her ability to make their loan payments. When the payments were due, there weren’t enough dollars available to make the payment.
The federal government doesn’t have that problem. All of our debt is issued in US dollars, and we print those. So, there is no scenario when we would not have enough dollars to make our loan payments.
But won’t buyers of treasuries worry that we will print so much money that they will be paid back with worthless dollars?
Not really, for a couple of reasons. It is true that most of the time the purchasing power of the dollar declines over time. The other way to say this is that we have inflation most years. This is why the normal rate for interest rates is a little above the expected inflation rate. The idea is to provide a good probability that buyers of US Treasuries will make money after inflation is accounted for.
Combine the expectation that you will make money after inflation is accounted for and the perfect record of the US paying its debt along with the expectation that it will keep paying its debt for as far into the future as we need to be concerned about, and you have a very safe investment. It doesn’t pay a lot, but the probability is so high that you will make at least a little on your investment that it is known as a risk-free investment for planning purposes.
Now, account for the size of the world’s economy. What the US Treasury market represents is the largest pool of believed-to-be risk-free investments in the world. So, all the pension funds, sovereign wealth funds, mutual funds, insurance companies, banks, on and on and on, are guaranteeing their customers that they will get their money back plus a little. So, it’s not unsurprising that the demand for treasuries is so huge. It would not be wrong to think of US Treasuries as the vehicle through which a very large amount of the world’s economy runs.
The demand for US Treasuries is not infinite. But there is also no indication at all of any weakening in demand.
Before I leave this subject, it’s important to address the cost of interest payments, which are now the 2nd largest annual expense of the US government and forecast to become the largest item in the not-too-distant future.
This is both a problem and not a problem. It’s a problem because it diminishes the government’s ability to spend money on other things and that is why the above quote from David Kelly is included. If our government is less able to spend money on infrastructure to run our economy, we all suffer because of that.
But it’s also not a problem because of the weird way government spending and taxation affect our economy. When the government spends money, including interest payments on the debt, that is money injected into our economy, and the world’s economy, and so it is stimulative. Deficit spending is one of the reasons the economy keeps chugging along and despite the seriously scary debt figures, the stock market keeps grinding higher. There are other reasons, but the continuous injection of money into the economy is a big one.
Note to our president, deficit spending is one of the reasons, only one of many, that we have so much more money to spend than most, maybe all, the other countries in the world. And so we have a trade deficit with most of the world. It’s fueled by our budget deficits. If you want to bring an end to trade deficits, you need to end budget deficits.
Deficits are not the main reason we are the most prosperous nation in the world. That’s our free market economy, entrepreneurial spirit, hard work, imagination, and great natural resources. But deficits do continuously stimulate our economy so that all the positive things Americans do in their businesses are amplified and are easier.
____________________________________________________________________________________________________________________________________________________