Transcript
The U.S. Can't Repay Its Debt
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the US national debt currently sits at $
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34.8 trillion for context the population
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of the US is currently around 333
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million people so that equates to over
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$100,000 of national debt per person but
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the wiring statistic is not the absolute
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value rather the trend as my friend
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Richard from the plane Bagel once said
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it doesn't take an economist to
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recognize that this is a pretty alarming
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chart but the scariest thing about this
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situation is that the US government
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can't pay the debt back literally they
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cannot do it the Congressional budget
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office has actually said that in 10
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years from now the situation is going to
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be worse than it is today not better so
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what does this lead to and is there a
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sneaky cheat code the US might be able
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to use to get around the debt problem
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well to get to that we first have to
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understand the basics so the government
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is $ 34.8 trillion in debt and they're
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adding more and more debt to the pile
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each year but how does that actually
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work well just like you and me a country
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goes into debt when they want to buy
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something they can't actually afford so
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like like us a country has income and it
How the Government Goes Into Debt
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has expenses and if it wants to spend
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more money than it actually brings in
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each year then it can go into debt to
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raise some more cash now just like us
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this debt needs to be repaid and if you
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get into a situation where the country
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can't pay back its debts the country
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defaults just like a homeowner who can't
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pay back their mortgage so how does this
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system actually work well if the
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government needs some more money they
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will sell what's known as a Government
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Bond so investors will loan out their
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money to the US Treasury and the treasur
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treasury promises to pay them back plus
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interest at some stage in the future and
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depending on the length of the deal or
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the Bond's maturity date the interest
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rate you get might be higher or lower
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for example right now the US 10-year
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treasury yield is at about 4.3% and
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that's an annual rate of return it's
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also worth noting that it isn't just you
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or me that can buy these government
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bonds either in the case of the United
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States a lot of businesses and foreign
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countries will buy these bonds for
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example Japan China and the UK are huge
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holders of US government bonds which
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means if the US were to default on these
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loans that would send Ripple effects
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throughout the whole world and lastly
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another interesting thing to mention is
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that the US Federal Reserve which is
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America's Central Bank can also buy
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treasury bonds and this is the process
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the US uses to print money and inject it
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into the economy the Federal Reserve
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will create money out of thin air and
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then buy government bonds to put that
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new money trademark pending into the
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hands of the government so that's how a
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country goes into debt and then the next
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thing to understand is well what on
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Earth is going on in the United States
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well remember the main reason a country
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goes into debt is because they spend
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more than they earn and this is known as
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a deficit so the worse the annual
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deficit the more money the government
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needs to raise in debt each year if the
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government spends $4 trillion and only
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generates 3 trillion they need to sell
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$1 trillion worth of bonds to make up
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the difference now have a look at this
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chart of the US Surplus or deficit over
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the years so back in the year 2001 the
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US actually did run a surplus AKA they
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earned more than they spent that year
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$130 billion in the black that year but
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what's a little scary is that this was
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the last year that the US made money
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since that time have a look at the
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annual deficit this is income minus
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expenses and as you can see Year bye the
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long-term trend is worsening even taking
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out the huge deficit years of 2020 and
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2021 the trend is still that the gap
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between spending and income is getting
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wider and wider each year now as I
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mentioned what this means is that to
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balance the books each year the
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government needs to raise more and more
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money AKA they need to sell more and
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more bonds to go deeper and deeper into
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debt and that's what we can see in this
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chart here in 2001 the national debt was
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around $10 trillion but as the deficit
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has worsened look at what's happened in
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23 years the debt has ballooned to a
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staggering 34.8 trillion now that is a
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huge debt load but the problematic thing
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is that the US can't pay it down and
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honestly they may not want to have a
The Size of the Deficit
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look at this this is the breakdown of
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this year's budget so fiscal year to
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date the US has brought in $3.29
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trillion in income and has spent 4.5
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trillion so since October 2023 they're
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around 1.2 trillion in the red but have
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a look when we break this down further
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how did the government generate their
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revenue well from taxes 51.7% from
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individual income taxes 34.2% from
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Social Security and Medicare taxes 99.4%
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from corporate tax and then small
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amounts from excise taxes estate gift
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taxes and customs duties now let's flip
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over to the expenses and see what's
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going on there 21% of spending has been
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on Social Security 14% on Medicare 133%
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on interest payments for their debt 133%
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on Health 133% on defense 11% on income
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security and so on you're probably
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already seeing the issue right to fix
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the deficit the US needs to either earn
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more spend less or do both all options
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of which are very unpopular I mean do
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you want to pay higher taxes of course
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not do you want budget cuts to social
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security schools hospitals or the
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military no thank you but this problem
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left unchecked is only going to get
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worse the Congressional budget office is
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actually expecting the deficit to grow
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from 2 trillion in 2024 to 2.8 trillion
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in 2034 and this worsening of the
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deficit overtime is predicted to swell
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the US debt GDP ratio from 99% this year
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to 122% in 2034 surpassing its previous
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high of 106% of GDP so it seems that
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America is trapped in a bit of a tough
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spot you know cutting back in certain
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areas is unlikely to be very popular but
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also raising taxes isn't very popular
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either right now just to make things
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worse the US faces another challenge on
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top of that one that they haven't felt
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in over two decades and that is higher
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interest rates you see the government
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doesn't set interest rates that's done
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by the central bank called the Federal
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Reserve in America now while they work
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with the US government they're actually
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separate from them and their main job is
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to raise and lower lower interest rates
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to keep the economy and the US dollar as
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stable as possible but the problem is on
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the back of all this inflation we've
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been seeing over the past few years the
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FED has now raised interest rates from
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zero to around 5 1 half% so why is that
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important well remember all of this
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government debt has a maturity date on
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it right once the Bonds hit maturity the
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US pays back the bond holder well in a
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deficit situation when these debts come
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due the US doesn't have that money to
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pay back their debts so they instead
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roll the debt over they sell more bonds
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to pay off the old ones but that's a
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problem in today's conditions because
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the previous debt would have been sold
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at very low interest rates whereas now
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the debt needs to be refinanced at much
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higher interest rates and what this
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means is that as more and more debts
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roll over the amount of Interest the US
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needs to pay each year Rises which
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increases their annual expenses which
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makes the deficit worse as we saw
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earlier so far this fiscal year to date
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interest has been the third largest
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expense category for the us since
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October 2023 spent $601 billion just on
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interest payments and going back to the
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cbo's report we can see that over the
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coming years that number is only set to
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rise they note that in 2025 interest
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costs are greater in relation to GDP
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than at any point since at least 1940
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and are expected to rise to 4.1% of GDP
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by 2034 totaling one 16th of all federal
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spending and as you can see with
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mandatory costs Rising this is going to
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greatly reduce the amount of
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discretionary spending that government
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could carry out which naturally means
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tougher times higher taxes or taking on
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even more debt to cover the increased
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interest payments this is what people
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are referring to when they talk about a
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debt spiral the idea that increased
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interest rates cause the interest
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payments on rolled over government debt
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to rise which means that the government
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simply borrows more money to account for
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that which in turn creates an even
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larger pile of debt with higher interest
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rates now obviously this isn't ideal and
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debt spirals can sometimes as the name
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suggests spiral out of control so the
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number one option is obviously to try
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really hard to reduce the deficit and
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return to Surplus in the long run but
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with that seemingly nearly impossible in
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the case of the US recently some people
Inflating Away the Debt
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have been wondering whether the United
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States might take a different approach
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that being inflating away the debt how
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does this work well think about this
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let's go back to 1970 for a second back
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then the median house price in the US
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was around
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$24,000 the average annual salary in
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America was
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$771 for a full-time job and a loaf of
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bread cost
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24.3 now just imagine you're taking out
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a mortgage back then say you took out
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the full amount of
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$24,000 now we look at that today and
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say holy smokes that's cheap you know
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how can that be today the same median
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house will cost you
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$42,882 standards have improved since
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the 70s but you're still buying a house
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right it's the same base commodity the
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reason the same commodity is so much
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more expensive today however is because
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of inflation you know wages have risen
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the cost of groceries have risen the
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cost of houses have risen and now we
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look at that $24,000 loan and say wow
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that mortgage is like half of my annual
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salary today today that mortgage would
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be so easy to pay off because our wages
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are so much higher well this same
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principle applies to the government's
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debt when people say The Government Can
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inflate the debt away what they mean is
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that the government can get into a
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massive pile of debt but then let
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inflation decrease the value of their
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currency so that in the future the
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government will be paying back all that
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fixed rate debt with money that is now
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worth less this is exactly what the US
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did after World War II the US used
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inflation to reduce its debt to GDP
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ratio so how would this occur today well
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it has a lot to do with money printing
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by the Federal Reserve is quantitative
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easing so stay with me here let's say
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the federal reserve prints a lot of
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money and buys some government bonds
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this increases the amount of US dollars
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in existence and it gives new money to
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the government to spend now what they
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could do with that money is invest it in
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creating jobs or building infrastructure
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or other programs designed at increasing
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the productivity of the United States
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and that's a good thing if productivity
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Rises then businesses and workers earn
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more which leads to higher incomes and
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more tax revenue low lower borrowing
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costs also means there's more investment
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which causes asset prices to rise and
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generally the inflation rate will pick
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up too and if this scenario continues as
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the years march on the acceleration of
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the US economy The increased GDP and the
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continued steady inflation of all things
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eventually make the past debts look
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smaller and smaller in comparison in the
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same way that 1970 median house price
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and median salary look tiny by today's
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standards so that's the general theory
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of inflating away your debt and it's
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great in theory but in practice it isn't
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quite as simple as that and that's
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because there's always consequences in
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economics the main problem with the
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theory is actually one that we face
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today and that is that when you do
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employ these stimulative measures to
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start encouraging
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inflation well you get inflation and if
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you leave inflation unchecked we know
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from history that it can very quickly
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get away from you which can lead to
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economic instability
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social unrest and at the extreme can
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cause a collapse or abandonment of a
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currency now as it's been well
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documented over the past few years the
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inflation rates we saw in America and
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around much of the western world were
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way too high to be sustained and thus
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while they might assist in inflating
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away the US government's debt burden the
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Federal Reserve has had no choice but to
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step in and raise interest rates to try
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and slow down inflation inflation was
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happening so quickly that it was
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actually a problem so by raising
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interest rates the FED puts the clamps
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on the economy and slows it down for a
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little while and that's what we're in
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right now so while the theory of
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inflating away your debt burden might
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sound nice in reality it does come with
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downsides and needs to be carefully
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monitored and that's why the Federal
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Reserve targets a 2% inflation rate as
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opposed to zero it keeps the economy
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pushing forward it keeps prices going up
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steadily over time keeps wages Rising
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steadily over time it encourages
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spending sooner which grows the economy
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and the big long-term benefit from a
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debt perspective is that slowly but
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surely devalues the currency making debt
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repayments from y to year easier and
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easier so overall that's the process of
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how the government the central bank can
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team up to lower the debt burden over
Fixing the Deficit
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time but with all that said I think it
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is worth remembering that the number one
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way to keep on top of the debt situation
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in the United States is going to be
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through smart fiscal policy and a
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particular emphasis on lowering the
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deficit at the end of the day the most
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sustainable long-term approach to a
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country's debt management is not to
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inflate the Deb away it's just to have a
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country whose financials work so while
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there might be some tricks you can pull
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out of the bag the number one focus at
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least in my view is that America should
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focus on being more productive and try
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to tighten the belt where it makes sense
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to do so you can take my home country of
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Australia for example now it is a
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different economy but you know the same
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principles apply for example Australia's
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budget outcome for our financial year
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ended on the 30th of June 2023 showed
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that while we too had some debt on the
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books with gross debt of around $890
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billion Australian dollars or 35.2% of
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GDP and you know we too had to pay
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interest on that government debt around
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11.9 billion Australian dollars this is
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less of an overall issue because the
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government returned a surplus of $22.1
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billion so in Australia for that year
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the government's cash coming in exceeded
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its expenses so the government made
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money that's the ultimate win because
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then they can decide to put that money
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to use building roads or schools or
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paying down debt if they want or even
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doing tax cuts which they did but
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overall that is the story behind
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America's debt situation also one thing
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I did just want to mention before I sign
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off I've been making a lot more
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Instagram content recently I've actually
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been really enjoying it so if you are an
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avid Instagram user please check out the
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link in the pin comment and come follow
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me over on there as well I'd really
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appreciate the support over there I am
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trying to grow up my Instagram presence
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a little bit more so I definitely
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appreciate you guys coming over and
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helping me out and lastly if you would
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like to support the channel and learn
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the proper step-by-step method to
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getting started in you're investing
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please check out stock market Investing
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For Beginners or introduction to stock
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analysis over on new money education the
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link for that can be found down in the
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description but with that said guys
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thanks very much for tuning in I hope
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you guys enjoyed the video please leave
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a like on it if you did and I'll see you
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guys in the next one
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[Music]
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[Music]
