Is the US national debt a risk for investment?

Brian Levitt, Global Market Strategist

Is the U.S. national debt really a problem? It’s approaching $35 trillion, more than 120% of gross domestic product, and growing fast. But a big number doesn’t necessarily mean imminent disaster or trouble. For investors.

The roughly $20 trillion in new debt added over the past 15 years may not bring us any closer to Judgment Day.³ For many reasons, the reality of the debt for investors and the American public as a whole differs from public perception.

Large deficits have usually been the result of recessions or crises.

Most years and under most administrations, the U.S. government spends more than it takes in in taxes, running deficits. These deficits tend to be significantly larger after recessions and crises, when tax revenues fall and the government spends to stabilize. economy.

The 2008 global financial crisis and the 2020 pandemic caused unusually large deficits, but the deficits have since fallen as the crises eased.^Four It could be said that the U.S. government’s ability to borrow money and support its citizens during the crisis prevented the economic downturn from becoming more severe or prolonged.

Concerns over sovereign debt may vary depending on the metric used

The current U.S. debt is over $34 trillion, which is more than the U.S. nominal gross domestic product (GDP) of $27 trillion.^Five Is GDP, the total amount of value created each year, an appropriate metric for assessing the sustainability of the U.S. debt? The United States is a very wealthy country.

For example, total household net worth in the United States is over $150 trillion, nearly five times the national debt.^Five From that perspective, debt levels may not be as problematic, which may be one reason why markets generally view the country as a good creditor.

The United States has low credit risk

With $34 trillion in liabilities and over $200 trillion in assets, the U.S. federal government has far more assets than many people realize.¹ Measuring debt against total assets, rather than as a percentage of GDP, which is primarily a measure of income, paints a much stronger picture of ability to repay debt.

If you combine all the U.S. government land, buildings, and natural resources, the country’s assets are probably over $200 trillion. Not all of them are liquid, but the United States is certainly a much better creditor nation than many people think.

U.S. Treasuries are in the spotlight

Investors are unlikely to lose interest in U.S. Treasuries, given that they are among the safest and most liquid assets in the world. The federal government holds 20% of U.S. Treasury securities, making it the largest single holder.² However, this debt is simply money the government owes to itself, so it does not affect the government’s overall finances.

More than 40% of U.S. Treasury securities are held by U.S. savers, pension funds, mutual funds, and financial institutions, who hold U.S. Treasury securities for safety, yield, policy requirements, and regulatory reasons.²

While it’s true that more than 20% of U.S. Treasury bonds are held overseas, they’re not concentrated in any one country. The largest overseas investors include Japan and the UK, but those countries have historically offered lower yields than the U.S. ²

China’s US debt exposure was successfully reduced

China is the second-largest holder of U.S. Treasuries, but given geopolitical tensions, should investors be concerned? Probably not. Some have suggested that China could weaponize U.S. Treasuries by selling them rapidly, sparking financial instability and a spike in borrowing costs. This risk seems unfounded, as China has been reducing its holdings of U.S. Treasuries for years without disrupting the Treasury market.⁶

Rising interest rates are only a problem if economic growth is slow

The US issues debt for a variety of reasons, and in theory the borrowed funds are used productively by the government. The interest paid (%) is the cost of this borrowing, and conceptually, US GDP growth (%) represents the government’s “rate of return”.

The US can pay off its outstanding debt as long as the rate of return (economic growth) exceeds the cost of borrowing (interest payments), which is currently the case.⁷

Demographic worries – Baby Boomers turning 65 – will soon end

The aging of one of the largest demographic groups in the United States, the Baby Boomer generation, was expected to put a financial strain on the country through rising health care costs. This risk has not materialized: Medicare spending has been much lower than expected, even as a large portion of the Baby Boomer generation has reached retirement age.⁸

Social Security will not go bankrupt

It is true that the Social Security Trust Fund is projected to be depleted within 10 years.⁹ But no matter what the doomsayers say, this is not bankruptcy: When the trust fund dries up, Social Security pays out based on tax revenues.

Interest from the trust funds will no longer be available to pay benefits, and because benefits will be based solely on tax revenues, retirees may end up receiving less than their full benefit.

But a country’s politicians can always adjust the program (for example, by raising the retirement age or the maximum tax rate) so that retirees receive less than they expected.

footnote

1Source: Congressional Research Service, U.S. Energy Information Administration, U.S. Department of Defense, U.S. Department of the Treasury, Bloomberg LP, as of December 31, 2023.

2Source: Bloomberg LP, U.S. Department of the Treasury, December 19, 2023.

3Source: U.S. Department of the Treasury, May 31, 2024.

4 Source: U.S. Treasury Department and National Bureau of Economic Research, November 30, 2023

5 Source: U.S. Department of the Treasury, U.S. Bureau of Labor Statistics, U.S. Federal Reserve System, December 31, 2023. Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all finished goods and services produced in that region during a specified period.

6 Source: Bloomberg LP, U.S. Department of the Treasury, November 30, 2023.

7 Source: Federal Reserve Bank of St. Louis, U.S. Bureau of Economic Analysis, Bloomberg LP, September 30, 2023.

8 Source: Congressional Budget Office, St. Louis Fed, December 31, 2022. Medicare spending is adjusted for inflation using the personal consumption expenditures deflator, a measure of how much U.S. households spend on goods and services.

9 Source: Social Security Administration, 2022.

Important Information

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Opinions expressed herein are the author’s as of July 2, 2024, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. These comments should not be interpreted as recommendations but as examples of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from expectations.

This document contains general information only, does not take into account any individual’s objectives, tax situation or financial needs, and does not recommend the suitability of any investment strategy for any particular investor. Investors should consult their financial professional before making any investment decision. Past performance is no guarantee of future results.

Is U.S. National Debt a Risk for Investment? Invesco US