For the first time in recent memory, a strange thing is happening, people and politicians in the US seem to care less and less about the federal deficit and the ballooning national debt.

A recent study by Pew Research showed that 48% of respondents in a survey conducted in the US, said that reducing the budget deficit should be a top priority for the president and Congress.

Source: Pew Research

This is down from a peak of 72% of respondents in 2013, which happened to be the start of Obama’s second term and the country was still recovering from the effects of the 2009 recession.

As you can see below, in terms of the budget deficit, the crisis produced wide deficits of as much as $1.4 trillion in 2009.

Source: Pew Research

Although controversial at the time because part of that 2009 deficit included the bailout of financial institutions and auto companies, I would argue it was a necessary expenditure along with quantitative easing from the Fed to stave off and even worse recession that threatened the entire globe.

However, since the final year of Obama’s presidency and since the beginning of the Trump presidency, the deficit has been growing and threatens to break the $1 trillion mark again soon.

There are two components that produce a deficit, how much the government takes in via tax revenues and how much it spends. Obama didn’t tinker with the tax code except for the healthcare penalty and pretty much extended the Bush tax cuts. So revenue just bounced along with the pace of the economy while spending increased due to the crisis.

The case now though, is that there is a revenue problem. Despite assurances from Trump and the republicans that the tax cut would pay for itself, it doesn’t seem to be playing out that way when you break down the numbers.

In addition, the desire for fiscal responsibility seems to have shifted. Traditionally the Democrats were the party of tax and spend, while Republicans were for lower taxes and were some of the most vocal deficit hawks. Now the tables seemed to have turned, well at least for the Republicans.

Source: Pew Research

The lowest amount of Republicans since the Bush presidency are worried about the deficit. This chart is probably the most disturbing because it seems to show a relationship between the party of the incumbent president not prioritizing the national debt whenever that party has power. Whoever is in charge cares less as they spend on their own projects.

How Did We Get Here and What is Driving It?

Deficits and overall debt have reached a new high globally as a percentage of GDP according to the IMF. As of 2017 end, global debt to GDP was 225%. Of this figure just 3 countries accounted for half of all global debt: the US, China and Japan.

Source: Pew Research

In the US the national debt has hit a post WWII high as a percent of GDP at 107%.

Source: Economics Help

So why do we have this ballooning debt and what seems to be driving it? Below you will find a chart breaking down government spending since 1962. Clearly demographics are at play with the entitlement spending which has grown significantly as the baby boomers age.

Source: Pew Research

The growing economy of the 90’s offered distinct advantages for the US: it allowed the government to pay down debt and it also shielded the rising cost of entitlements like Medicaid and Medicare. With the end of the Cold War, defense spending could also take a lesser role in spending.

One thing that is on the horizon though that no government has grappled with recently, is the higher interest rates on the higher debt levels. In the 80’s and 90’s interest rates took a big chunk of spending and debt levels then were lower. If rates continue to rise more and US growth continues to be mediocre, higher rates would cause one of two things to happen:

• The government would have to cut back programs, which is not politically viable for the party in charge.

• The government will have to issue more debt and start a debt spiral where interest costs require more issuance of debt to pay out the same benefits.

The can has been kicked again and again down the road in terms of Social Security and Medicare reform, when high debt, expensive interest and higher entitlements all collide, either the world will have to buy more US debt or the government will have to cut back in terms of its spending. The path of least resistance so far has been more debt, which obviously Washington has taken.

This brings us back to global debt, this is not just the case in the US. Advanced economies all over the world are dealing with again populations with increasing social expenses that their citizens have paid for and expect. It’s a political time bomb no politician wants to touch so they continue to delay.

So Who is Funding the Debt Now?

If you take a look at the holders of the US national debt you will see that an important owner is actually the programs run by the government itself, which is called intergovernmental debt.

Source: The Balance

The intergovernmental debt accounts for $5.7 trillion of the $20.5 trillion that was outstanding at the end of 2017. Of that, the Social Security Administration accounted for about half.

Source: The Balance

On the other hand, when we take a look at the rest, which is called the net debt, we see that the Fed, municipalities and foreign governments account for about 65% of the rest of the debt holders. The most important of the foreign holders being China and Japan, each large economies that want to keep their exports cheap to sell goods to US consumers. Each of these governments holds over a trillion dollars in US debt.

Source: The Balance

So foreign governments are an important source of funding for the US social programs at this point. What will happen over time as China grows and potentially becomes less focused on exporting and more focused on its own economy and therefore eases up on its need to sell to US consumers? How much of a bigger role will the Fed have to take on if a larger buyer decides to drastically reduce their holdings? This is how far off decisions could essentially affect the decisions politicians will have to make for everyday Americans and is a reason why people should be more concerned about the national debt.

Conclusion

It’s not too late for a discussion to begin on ways to reduce the debt, growing out of it is nice but there needs to be active unpopular management of current government expenses to manage the risks moving forward.

More worryingly, we are starting to see proponents of an obscure monetary theory called Modern Monetary Theory argue that government debt and deficits don’t matter and there is a way through this to offer a jobs guarantee to all. While interesting from an academic point of view, this is an untested theory and seems to have no accounting for inflation. Be wary of those offering the moon and a way out of the potential debt bomb being created by the government.

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