$22 Trillion U.S. Debt Only the Tip of the Debt Iceberg
$22 Trillion of debt is a huge amount, almost beyond comprehension, but when you add in $70 trillion more, the number gets a lot bigger. It’s also about to grow much bigger.
There is already lots of concern about the exploding U.S. national debt, but as it turns out, this is more like the part of the iceberg that is above the surface. As is the case with all icebergs, what you see is only a portion of the size of it, and there is much more beneath the surface that is hidden from view unless you dive into the water and examine the entire thing.
The $22 trillion that we can see, the part that is reported on the books, in itself should give us plenty to be concerned about, even without looking at the larger part beneath the water line. $22 trillion is a hard number to imagine, although this is a bigger number than the country’s entire GDP for 2018, which is only about $18 trillion.
What’s really alarming about this figure isn’t so much how big it has grown, it’s how fast it is accelerating. For the first 231 years of the country’s history, we racked up $5 billion in debt. Over the last 11, we’ve grown it by another $17 trillion. If we were to project this pace forward, in another 11 years, in 2029, we’d be looking at almost $97 trillion, and in another 11 years after that, our debt would rise to a massive $425 trillion.
These are even harder numbers to envision, but if we look at how much this all works out per person in the country, in just 20 years, we’d be going from the about $65,000 today to over a million dollars, which is as ridiculous a number as it sounds.
If that’s not enough, this all assumes that the growth rate over the last 11 years will be constant. It’s actually accelerating though, because as it grows, the interest owed on this debt will grow as well, and since this needs to be borrowed, this borrowing in itself adds to the debt, which requires more borrowing, and so on.
We need not look any further than how quickly things have accelerated over the last few years to appreciate how impactful acceleration is to this problem. What makes this even worse is that rates are at historic lows now, less than half the historical average. If the percentage of interest we have to pay goes from the mid 2’s to 5%, say, then we have to pay twice as much interest each year on this massive amount.
The Other $70 Trillion
This is, though, just the tip of the iceberg, and the part below the water is also something we also need to take very seriously. The country’s off-the-book debt, involving future obligations the government has taken on or would be likely to, is now at $70 trillion by some estimates.
Even though the $22 trillion already owed is several times smaller, this still remains the biggest threat over time, as these future obligations are not accruing interest yet, and therefore is only growing in a fairly linear fashion, like our incomes or our investments grow. National debt, on the other hand, is growing exponentially, which is what you call something that grows 4 times in size in 10 years.
Some may look at the static numbers and think that since $70 trillion is a lot more than $22 trillion, it’s the bigger worry. It’s a big one to be sure, and enough to get people to speak of the collapse of government programs like Medicare, but on the course that we’re on, the national debt will surpass it and eventually dwarf it in the coming decades, that is if we manage to keep it together enough to even get to this point.
Future obligations are just that though, money earmarked for various projects, and Medicare obligations only comprise about a third of this. The U.S. government has its hand in a great many things, and all contribute to these future guarantees of funds.
The biggest implication of this larger portion of the actual debt is not how much it is but how we plan on meeting these financial commitments. The two parts of the iceberg and very much entwined, and as we look to meet these obligations over time, this will cause the national debt to grow even faster.
It’s not even that we actually pay down this debt these days, as this would actually require a budget surplus. Since the debt is growing each year, we’re going more and more into debt, and if we need to borrow even more to meet our future obligations, this means using less money to pay off interest and in itself increase the acceleration of what we owe.
To put this into perspective more, if it costs us a billion dollars a day now in interest, that in itself will keep speeding up, to 5 billion a day, then 10, and so on. We do pay some of this interest back, which is actually very important to maintain investor confidence, but if money is needed elsewhere, this means less and less capacity to repay, and capacity to repay is a huge deal when it comes to debt markets.
These Additional Obligations Will Stress the System a Lot
This is all eerily similar to a Ponzi scheme, although on an entirely different scale than Charles Ponzi or even Bernie Madoff could ever dream of. When you deflect payments from a Ponzi scheme, this is where the whole thing unravels, when reality starts trumping fantasy.
We don’t even need to worry about what is in this $70 trillion bundle, other than to say that it involves things that the government needs to spend money on. Managing financial crises is part of this, and we definitely want to be doing that with so much at stake, including this heap of debt.
Social benefits such as Social Security and Medicare will require a lot of money to maintain, and there’s also things like loans the government makes to help things along, housing subsidies, the FDIC, the Federal Reserve, Federal government trust funds, and more.
The real concern isn’t even whether we’ll be able to maintain these programs in their present form, and we really won’t be able to. However, we will try, and this will get more and more difficult each year, but it’s the trying that is the real risk.
U.S. treasuries command the lowest interest rates because the risk of insolvency over a given period that the treasuries cover is seen as so low. Our out of control debt growth isn’t really increasing this risk in a meaningful way, yet, but if we have to take action to manage these off-the-balance sheet liabilities and this action has a negative effect upon the size of the debt and the size of the interest obligations that come with it.
The goal, at least ideally, would be to reduce the debt. This is made much more difficult given the government’s operational spending, which people don’t really want to see knocked down too much, and doing this to some extent would also be economically unsound.
It’s already hard enough to imagine our making any real progress here, but this is made far more difficult when we also add to the year to year spending this massive amount of future liabilities.
It is not unlike our owing a lot more than we’re making and borrowing more and more to pay for not only our excess spending but our excess amount of interest as well, and then considering that our spending will have to grow quite a bit down the road, for instance with the cost of putting several children through college, which isn’t exactly going to improve our prospects of getting a handle on what we will owe.
Any plan to recover from this mess will therefore involve our creating ongoing budgetary surpluses, involving spending large enough to handle both paying down the debt as well as these upcoming obligations. We will have to pay all of the interest we owe as it accrues, pay for the ordinary stuff, handle this huge future load coming, and have some left over to pay down the principal. That’s a tall order.
These future debt obligations are going to make this even harder, which is why this is an even bigger issue than we may have thought. This is not at all just about things like providing benefits to seniors, the way of life of the entire country is on the line here.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
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