‹ View All Insights

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?


1 Statista

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

3 Ned Davis Research

4 Charles Schwab, CBO


The content in this article is provided for informational purposes only, reflects our general views on investing, and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. While we believe that the third-party data cited to herein is reliable, we cannot guarantee this data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose. 

Access to Motley Fool Wealth Management (“MFWM”) is only available to clients pursuant to an Investment Advisory Agreement and acceptance of MFWM's Client Relationship Summary (PDF) and Brochure (PDF - 204 KB). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

MFWM, an affiliate of The Motley Fool (“TMF”), is an investment adviser registered with the U.S. Securities and Exchange Commission. MFWM is a separate entity, and all financial planning and investment advisory services are provided independently by the certified financial planners and asset managers at MFWM. No TMF analysts are involved in the investment decision-making or daily operations of MFWM. MFWM does not attempt to track any TMF services.

During discussions with our Certified Financial Planners, they may provide advice with respect to 401(k) rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.