For as long as I’ve been aware, the United States has been over $20 trillion in debt. However, the US is still the richest country on the planet and manages to keep the vast majority of its people off the streets. And as far as I know, this number is only increasing with time. So then why does it even matter?
In: Economics
Copying, pasting, and adding a few edits to my response to a similar question from earlier today.
When measuring debt burden, the most popular calculation is to compare a country’s debt to its GDP, since GDP represents the size of the economy and thus the taxable transactions that can be used to service its debt.
The [US debt-to-GDP](https://fred.stlouisfed.org/series/GFDGDPA188S) ratio is around 106% right now. This is historically very high–the highest it has been since shortly after World War II. By comparison, there are a few developed countries, with relatively stable economies, that have a [comparable or higher ratio](https://worldpopulationreview.com/countries/countries-by-national-debt/#undefined), but not many. Among them are:
* Japan has the highest in the world, at 237% of GDP.
* Italy is at 133%.
* Singapore is at 109%.
* Belgium, France, and Spain sit at around 100%.
Overall, the US is comparatively high, but not the highest and other countries are demonstrating that creditors are certainly willing to buy a country’s debt even if the burden is higher. But there are still reasons to worry about the debt.
**We are paying interest**–currently about 16% of the federal budget just goes to pay interest, and this at a time when interest rates have been very low for more or less 20 years. [Here](https://fred.stlouisfed.org/series/DGS5) is a chart of the interest rate on a 5-year treasury since the 1960s. Note how low interest rates have been for the past ~20 years compared with most of rest of the chart. If inflation and interest rates go up, the cost of interest will follow over time, even if we don’t increase the debt at all.
**Deficits are high during a strong economy**. In the past, deficits tended to drop during economic expansions because tax revenues increase. We should only see increasing debt (at least compared to GDP) during recessions. Last year we had close to a $1 trillion deficit even though the economy was very strong. During the next downturn (which, by the way, has almost certainly started because of COVID-19) our deficit is going to explode.
**We aren’t going to be able to pay this one down as easily as the last time**. In WWII, our debt/GDP hit around 120%, but after the war the burden quickly fell. This is because we had ramped up spending to pay for the war, but then the war ended and all that extra spending went away. At its peak in 1945, [nearly 90% of the US Federal spending was for the war](https://www.whitehouse.gov/wp-content/uploads/2020/02/hist_fy21.pdf). (Table 3.1) Today, our entire defense budget is only [15% of the Federal budget](https://upload.wikimedia.org/wikipedia/commons/3/39/US_Federal_Budget_Comparison_2016_vs._2015.png). Even if we cut *all* defense spending we would still be running deficits. This is because most of our Federal budget now goes to entitlement spending. The reason this is a problem is that, politically, its nearly impossible to cut entitlements. Europe tried it 10 years ago and the result was massive protests and riots. Instead, we are paying more and more for entitlements every year.
Eventually we are going to have to cut benefits and/or raise taxes (including for the middle class), but we are going to keep putting it off because no one has the will to do it today. Therefore the problem will continue to snowball and when our credit rating finally forces us to do something, the pain will be significantly worse.
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