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Worried About the National Debt? 3 Questions Answered

Published by Motley Fool Wealth Management on Wed, Oct 13, 2021
Worried About the National Debt? 3 Questions Answered

Following the $5.9 trillion of enacted COVID-19 relief to date and the possibility for further spending on infrastructure and other programs, many investors are worried about the national debt.1 Is the rising national debt a cause for concern?

We answer three questions on the top of investors' minds.

1. Does higher debt increase inflation?

No. Five decades of data show that rising debt as a percent of gross domestic product (GDP) has coincided with decreasing inflation.2

email-chart-public_debt_gdpBut what about the recent spike in inflation? We believe the current rise in prices is transitory—and should ease as COVID-19 supply chain issues improve.

2. Does rising debt choke economic growth?

Possibly. Nearly 70 years of data show that at a debt-to-GDP (debt/GDP) of 75% or lower, economic activity tends to be highest. However, so does inflation. Conversely, debt/GDP above 105% corresponds to low economic growth and inflation. Another difference? Business investment tends to be meaningfully more significant with a lower debt/GDP.3

Despite these findings, the “why” remains a question: Does increasing government debt shut off the growth spigot, or does slowing growth spur higher government spending?

3. How will recent federal spending impact the future?

Unknown. According to Congressional Budget Office estimates, interest payments on the recent surge in government debt will grow faster than any other federal expenditure over the next 10 years.4 That makes sense—a surge in borrowing means interest payments will also swell. However, that is the growth rate of spending. The government will still lay out far more on social services.

Beyond higher interest payments, answering this question is not easy because of two unknowns. First, how will current spending impact the government's flexibility for future expenditure? Second, will borrowers demand higher yields because they view U.S. debt as riskier, increasing borrowing costs for the U.S. government?


Footnotes

1 Statista

2 Charles Schwab, Bloomberg, as of March 31, 2021

3 Ned Davis Research

4 Charles Schwab, CBO

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