Managing the US National Debt

On an individual or household level, debt levels are closely monitored. A bank or lending organization will determine a borrower’s repaying capacity by how well past borrowings have been serviced. These transactions reflect organizational or personal credit history.

When a country borrows, a similar system of credit rating applies; only it seems much less strictly monitored.

A Long History of Debt

The US government’s debts first began accumulating in 1775. Several decades later, in 1835, it became debt free for the first time. Then US President Andrew Jackson was able to fully eliminate debt by selling state-owned land. This remains the only time in the country’s history when it was debt free.

For the following almost 200 years, the US has again continually been in debt. And with each administration, the debt levels have only ballooned further. As of 2021, federal dues are a staggering US$28.2 trillion. Despite the burgeoning commitment, the debt ceiling has been raised time and again.

What is also interesting to note is the US has registered record debt levels over the past two years. In only 48 months, it racked up as much debt as it did over two centuries. 

From a macroeconomic standpoint, an economy, a company, a household or an individual ought not to live beyond its/their means. Yet, through 2020 and 2021, the need to control the pandemic, and its consequences, have seen a huge debt accumulation. Why does the US, the world’s wealthiest economy face such acute difficulty in setting its debt ceiling? Could it manage this in any way that does not worry media pundits, investors, and business leaders alike?

Horasis is organizing the Horasis USA Meeting on 04 March 2022 to examine and evaluate such issues. The one-day virtual event will see participation from a diverse range of people, spanning members of governments, businesses, academia, and the media. The goal is to deliberate on pressing issues that undermine progress and arrive at actionable solutions that can ensure shared prosperity.

Government Debt Levels are at an All Time High

The US has been a major contributor to global development. From enabling the growth of technology organizations to spearheading manufacturing, and from encouraging research and development across diverse segments to leading the world order, the US’ has been an example to emulate. However, its inability to rein in debt has been a significant shortcoming.

With COVID-19 associated costs adding a further burden to the exchequer, the US Federal Government must tread with caution. Several of President Biden’s policies have signaled a conscious effort in this direction – most notably his decision to fully withdraw all troops from Afghanistan. Conflicts in the post 9/11 era have cost the US an enormous US$8 trillion, according to a Brown University study. This figure accounts for over 33% of the US’ current debt exposure.

Key Areas with High Household and Individual Debt Levels

The bulk of US debt is seen across four key spheres – namely, home mortgages, auto loans, student debt, and credit card dues. While home loans account for the largest share of debt, the fastest increasing debt area is non-housing credit. Over the past eight years, this segment has recorded an over 50% increase.

Home loans, in particular, have seen a US$1 trillion increase between 2017 and 2021. It amounts to an estimated one-third of total US debt, at US$10.4 trillion. But by macroeconomic yardsticks, this trend signaled an increase in investor confidence.

Coming in at a significantly lower—albeit still sizeable—quantum was auto debt. It totaled US$1.37 trillion. The increase in borrowing for automobile purchases has largely been boosted by the availability of lower interest rates. Education or student loans ranked third in terms of total debt. On average, US students were about US$40,000 in the red after having covered for tuition and living expenses. Lower interest rates have encouraged more students to enroll for higher education.

The fourth key area where household and individual debt levels are high is credit card debt. The US has among the highest credit card penetration rates globally. As of Q4 2020, credit card debt totaled US$820 billion. Interestingly, unlike home, auto, and student loans that saw increases over the past few years, credit card debt saw a decline in 2020.

Debt Must be Reined In

It is imperative for the US to avoid perpetually raise its debt ceiling. Fiscal responsibility must be exercised because while policymakers often cite the lack of alternative routes to ensure smooth functioning of the economy, it must be recognized that an undefined debt ceiling is building up to a precarious scenario. Left unchecked, its consequences may not affect the present situation. But an epic economic catastrophe is a very real possibility in the not-too-distant future.

Photo Caption: The US national debt is at alarming levels.