A friend told me about a late 1960s conversation he had with his grandfather, a veteran of World War I. He asked the old man what, if anything, worried him. Expecting concerns about another world war (this was in the midst of the Vietnam War) or possibly a general fear of death, (At 68, the old man seemed practically ancient to my friend, then only 10 years old.), he was surprised by the answer: the national debt. At the time, it was $350 billion.
In the ensuing almost 60 years, the debt has grown to $36.2 trillion, an annual increase of 8.5%, or more than twice the 3.95% annual inflation rate. And that staggering figure doesn’t account for another estimated $70 trillion of unfunded liabilities associated with promised Social Security and Medicare benefits.
Like deferred maintenance on the Gay Street bridge, the national debt won’t become a problem until it does – which elected officials hope happens long after they leave office. Unlike the Gay Street bridge, the national debt day of reckoning is still sometime in the future. Is there any way to know when that day might be? Or is it possibly so far into the future that we can simply let AI and our great-great-great grandchildren worry about it?
Leading economists warn that a national debt exceeding 130% of GDP would be a tipping point for fiscal disaster. (The figure is currently about 124%.) The first house I purchased cost 300% of my personal GDP (my income), so I’m not convinced there is anything magical about the 130% level. Instead, we should think about the national debt in the same way a naïve car buyer might: “I don’t care how much it costs; what are the payments?”
This year interest on the national debt will cost about a trillion dollars, or about 20% of the estimated $5 trillion of revenue the government is expected to collect. That trillion dollars isn’t available to spend on defense, local non-profit grants, roads, Social Security, research, or impeachment inquiries. Without adding a penny to the debt, a 2.5 percentage point interest rate increase would require almost 40% of tax revenues to pay the $1.9 trillion of annual interest expense. At that point, we would likely be borrowing the money necessary to pay all interest expense – starting a spiral that could only be corrected by some combination of drastic spending cuts or hyperinflation.
Continuously letting the debt grow faster than the economy is like ignoring the warped steel and hidden cracks beneath a bridge’s surface. Ignoring the warning signs doesn’t strengthen the bridge. It only assures that when it finally gives way, the collapse will be far more costly to repair.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.