U.S. National Debt: How Will We Ever Pay Off $28 Trillion?
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm answering one of the most common questions that I'm getting from retirement savers right now, which is how will the US government ever be able to pay off its debt? If you've ever asked this question and you want a clear answer in plain English, today's episode is for you. For the links and resources mentioned, head over to youstaywealthy.com forward slash 129.

So yesterday, October 4th, President Biden stated that the government could breach its $28.4 trillion debt limit in a quote, historic default unless Republicans join the Democrats in voting to raise the limit in the next two weeks.

Now, before we talk about how ridiculous these debt ceiling debates are, let's first talk about the elephant in the room, the $28 trillion of debt sitting on our nation's balance sheet.

$28 trillion is a giant number, but I'm going to share why it's maybe not as big of a problem as most of the talking heads and media outlets and politicians make it out to be. And to help do that, let's look at this from an angle that most of us can better relate to. And let's use my friends Charlie Credit Card and Betty Business Owner as examples here.

Charlie Credit Card, he's terrible with money. He lives paycheck to paycheck, he has no money in savings, and he's racked up $100,000 in credit card debt with a 15% interest rate. He can't stop spending money and the debt is increasing every single day. On the other hand, Betty Business Owner, she also has $100,000 in debt, but it's a business loan from her local bank at a 4.5% interest rate.

And she used that loan to help start her tech company, which now provides jobs to 10 people and generates a million dollars in revenue every single year. In fact, she just received an offer from a competitor to buy her business for three and a half million dollars. In other words, her $100,000 loan from the bank not only provided employment for her local economy, but it was also used to create an asset that's now worth over $3 million.

I think we would all agree that Charlie Credit Card is an example of how not to use debt and Betty Business Owner is an example of using debt properly. You see, what we did with Betty and what any of us would do when evaluating our own finances is we looked at both sides of her balance sheet. We didn't just look at her $100,000 in debt in isolation. We looked at her debt and compared it to the asset side of her balance sheet.

We also took the productive economic output, i.e. the jobs that she created into consideration as well.

Another example, perhaps you have a $500,000 mortgage, but your house is worth a million dollars. Well, subtract your debt, that $500,000 from your asset, and you have a positive net worth of a half a million dollars. Once again, we looked at both sides of the balance sheet. $500,000 in debt sounds like a lot on its own until we reveal what the asset we use to buy and the asset that we own is actually worth.

Going back to Betty for a moment, let's say that she declines that $3.5 million offer knowing that she's on to something and all she needs is another $100,000 loan from the bank so she can hire one more engineer to tie a bow on the most recent development she's working on. And she thinks that by doing that, she can boost her company valuation to $10 million.

In other words, her balance sheet is going to expand. It's going to get bigger. She's going to take on even more debt, but also is going to have a larger asset as a result. So in that case, balance sheet expansion isn't necessarily a bad thing.

Charlie Credit Card's balance sheet is also expanding, but only on one side, the debt side. The expansion of his debt isn't helping him expand his assets. It's just putting him more and more in debt. And in this example, balance sheet expansion is not a good thing.

For some odd reason, we just don't think about things in this way when we're evaluating the U.S. government debt. We hear $28 trillion in debt and we think, how on earth are we ever going to be able to pay this back? But we don't stop to think about the other side of the balance sheet. Certainly, $28 trillion didn't just get flushed down the toilet. The U.S. is the largest consumer market and the highest market cap in the world.

So surely some of this debt has been put to good use. And remember, all of the money in our economy is an asset for one person and a debt or liability for another. For example, US Treasury bonds are a liability to the government, but an asset to retirement savers just like you who purchase them for income. If you remove the debt, you're also going to take the asset away from somebody else.

If you pay off your home loan, you remove your debt, but the bank also loses an asset. Loans expand balance sheets and loan defaults or even loan repayments, they will shrink them.

In the long run, we want our government's balance sheet to expand because as our economy grows, we will likely need to invest in more law enforcement and more military, maybe more infrastructure, etc. And we'll need to incur debt in order to fund our needs. If the government paid off its debt, our balance sheet would shrink and that would cause all sorts of major problems. One of them being the example about retirement savers using Treasury bonds as an investment to provide income.

Pay down the debt and you're also taking away that asset. Now, this doesn't mean that we want to rack up debt quickly and irresponsibly here. It's been proven that irrational and rapid spending can lead to high inflationary periods. So we need to strike a balance. And we also need to first acknowledge that there are two sides of a balance sheet. And looking at the debt in isolation only tells one part of the story.

My friend and colleague Colin Roche sums all this up really well in an old article of his by saying, quote, The big picture message is that the idea of paying off the national debt is a fallacy of composition.

We need more balance in these discussions about government debt. While we wouldn't want to pay off the national debt, we also wouldn't want to expand it irrationally as both of these scenarios have the potential to create outsized and unnecessary risks for the economy.

Before I circle back to the debt ceiling comments at the top of this episode, I just want to first quickly acknowledge that evaluating and understanding the current state of the government's balance sheet is a very different conversation from the process of printing money, let's say, in an effort to solve economic problems. The latter is a much longer conversation for another day and another podcast episode.

So going back to this comment about the ridiculousness of the debt ceiling debate, which is where I started this show, Colin Roche is just a master at translating these complex economic and monetary policy topics into plain English. So I want to give him another hat tip here and credit for clearly explaining how these debt ceiling debates work.

So he lays it out in this six step process here. Step one is Congress establishes a debt ceiling, which is essentially a fake limit on how much debt we can issue as a country. So you heard Biden at the top of the show quote that $28.4 million debt limit that we're running up against. So step one, Congress establishes this debt ceiling, this fake limit on how much debt we can issue as a country.

Step 2: Congress then subsequently approves new legislation that will require more debt in the future. Step 3: That new legislation causes a breach in the fake debt ceiling limit that we previously created. Step 4: Congress pretends that they're going to default and make a bunch of noise about the current national debt levels and they potentially shut down the government for a week or two.

Step five, the debt ceiling gets raised because the legislation previously approved by Congress forces Congress to raise the debt ceiling or default. And we know that defaulting isn't a viable option based on everything we just talked about in this episode.

And then step six, rinse, wash, repeat. We've seen this before. Cullen adds that, quote, the debt ceiling isn't instilling any discipline in the way that we manage the national debt. Instead, it's just creating an annual charade, causing unnecessary shutdowns and uncertainty around the bond market. It's time to break the debt ceiling permanently.

There are obviously a lot of nuances to these situations. And sure, it may not be as simple as removing the debt ceiling entirely, or just simply saying that an expanding balance sheet is good and a shrinking one is bad, or accepting that $28 trillion of debt isn't a big deal as long as it doesn't grow too quickly and cause inflation.

What I hope everyone walks away with from today's episode is that there's more to this ongoing, never-ending story about government debt than what meets the eye.

Federal government could breach its $28.4 trillion debt limit and a historic default is used as a headline for a reason, to get eyeballs and clicks and sell advertising. Don't let the headline spook you into making irrational decisions and remind yourself that debt doesn't equal bad, unless your name is Charlie Credit Card, of course.

For all the links and resources mentioned today, head over to youstaywealthy.com forward slash 129. Thank you as always for listening, and I will see you back here next week. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.