I was recently asked about an article that came out in the Daily Maverick on the impending doom of the Western order. A central argument is that the use of debt by Western Government, and the US in particular, is unsustainable.
It made me think of this cover from Time magazine –
If you squint at the top right of the picture (it’s a bit blurry) you can see this came out in March 1973.
I’ve written about the US dollar before.
The point is that people have been sounding the alarm on US government debt for decades. And yet, there has been no panic. No financial crisis. No debt default.
The US has obviously added a ton of debt since then, especially in the last couple of years with the fiscal response to COVID-19.
Here’s a chart to illustrate – it shows US Federal debt since 1970.
Chart: US total debt
COVID-19 pushed debt up rapidly (remember all those bailouts and checks?). Total debt now stands at almost $34 trillion. That’s a mind-boggling number.
Well, the thing about debt is that it’s relative. For example, if a person earning just R100,000 per year owes R1 million, that’s a problem.
But if a person earns R1 million and they owe R1 million on, say, a home loan, then I’d consider their debt pretty sustainable.
Obviously, we would ask how safe they are in their job – are they a hard worker? Do they have specialist knowledge? How hard would it be to replace them? These are the qualitative factors, in addition to the quantitative factors (like annual revenue), we would use to determine the likelihood of a default.
The point is that debt is relative. It’s not the debt itself you should worry about, it’s the ability to service the debt that’s important.
The chart below shows the US interest payments as a percentage of revenue. It’s sitting at about 14% of revenue, and it has come down since the late 1980s. In fact, its below levels seen as recently as 2012.
Chart: United States – Interest Payments (% Of Revenue)
So, while the total debt has increased, clearly revenue (and the ability to service that debt) has too.
The chart below shows South Africa’s interest payments as a percentage of revenue – we are slightly worse off than the US.
Chart: South Africa – Interest Payments (% Of Revenue)
How would you compare the US and South Africa if they were individuals in their ability to pay off their debt? While the quantitative levels are similar, the qualitative factors are miles apart.
The point is that while US debt has increased exponentially, so has its ability to service the debt.
Have a look at the history of US Gross Domestic Product (GDP) – this is just the sum of all goods and services produced each year.
Chart: United States GDP
That’s one clear way out of the debt – simply growing one’s economy. Well, that trend is pretty positive. This is something the US has been pretty good at (a bit of an understatement).
The most valid concern on US debt is if the interest expense crowds out spending in other areas. Their interest expense relative to the size of the economy has shot higher in recent years from the combination of more debt and higher rates:
Chart: US interest as a % of GDP
But we see it is still far from the peaks seen in the 1980s and 1990s.
And when looking at the absolute numbers, moving from 1.5% of GDP as an interest expense to 3% of GDP isn’t catastrophic.
I have no doubt that US debt will continue to grow. But remember, it’s not helpful looking at the debt in isolation. If the economy continues to grow, government debt will naturally increase as well—it’s just a function of a growing pie.
