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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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US deficits / debt soar; should you care?

As my readers know, I am increasingly concerned about the US deficit, mainly because Congress (both parties) and the President both seem oblivious to concerns about it ballooning at a pace that could eventually prove to be unsustainable.  The causes of deficits are easy to understand:


  • Deficits are created when government expenditures are significantly more than government revenues,

  • These deficits have to be financed by the Treasury Department issuing new debt, and

  • An increasing stock of US Treasury securities increases the overall national debt. 


As simple as this is to understand, reducing annual deficits is a complex problem for US politicians to address.  Congress – the branch of the US government responsible for approving the discretionary portion of the annual budget in the US – seems inept at agreeing a nonpartisan solution to reining in the ever-growing deficit.   Deficits will continue to worsen in the coming years if the causes of the deficits are not addressed by Congress soon, since a trifecta of issues related to costs – specifically rising healthcare costs per capita, America’s aging population, and rapidly escalating interest costs – are projected to continue to grow much faster than revenues.  shows how quickly US debt is increasing in real time, which is scary.  The current trajectory of US deficits is illustrated in the graph below from the Peter G. Peterson Foundation, an excellent nonpartisan resource for better understanding the US government and the fiscal challenges faced by America.

Is growing US debt an imminent concern?

The key word in the question above is “imminent”.  I suspect the burden will fall on your children, their children and future generations rather than those of us that are perhaps nearer to the end of our lives.  This of course makes it easier for older folks to “kick the can down the road”, the same response of Congress for decades, but the chickens might just come home to roost at some point, probably when least expected.  Renowned economist Paul Krugman seems to think differently, in that he is both less concerned about the level of US debt and thinks Congress can sort itself out, a position I find difficult to buy into so readily. Mr Krugman recently provided his views in an article in The New York Times entitled “Why You Shouldn’t Obsess About The National Debt.”.   


US debt and deficits from 10,000 feet: the basics

Before I summarise Mr Krugman’s thoughts, you might wish to reflect on the following facts about the US debt and the ever-growing deficit.


  • 2023-24 budget: At the moment, the US is expected to spend $6.5 trillion in the budget year ended September 30, 2024, with tax revenues of $4.9 trillion, creating a deficit of $1.6 trillion.  The pie chart below, albeit slightly dated (with lower expected expenditures and revenues), provides a good illustration of the “rolling” 2023-24 budget and expected size of the deficit.

  • Appropriations subject to Congressional approval:  As the pie chart above illustrates, only $1.7 trillion of the expenditure side of the budget is subject to annual approval by Congress, since the remainder is mandatory (mostly Social Security and Medicare) or represents net interest on outstanding US government debt.  Of the $1.7 trillion discretionary amount subject to annual Congressional appropriation, roughly $917 billion is non-defence related and $805 billion is defence related.  You can see some of the major discretionary expenditures in the graphic below.

What does Mr Krugman think?

With this context, let me turn to Mr Krugman’s NYT article which might only be available to subscribers.  I will summarise his major conclusions as I understand them.  


  • The national debt and annual deficits get an increasing amount of attention and concern, but in fact both are manageable.  He notes that the federal debt of the United States is $34.8 trillion ($27 trillion excluding debt held by US agencies).  With nominal GDP of $28.5 trillion, this means that total debt-to-GDP of the US is currently around 122%.  Mr Krugman points out that this is the same level of US debt-to-GDP at the end of WW II, and is considerably lower than Japan now (>250%), with neither scenario generating any discussion of a debt crisis.  Although true, the “trend is not our friend”.  The debt-to-GDP ratio in the US has increased gradually, and in gradients, since 1966 (which is when data is first available on FRED).  US debt-to-GDP was / is:

    • 30% to 40% between 1966 until 1985;

    • 45% to 65% between 1986 until early 2008 (just before the GFC);

    • 90% to 105% between 2010 (post-GFC) and 2019 (pre-pandemic); and

    • 120% to 130% since the pandemic.

Graphically, the trend of debt-to-GDP in the US is depicted in the graph from FRED below.

Mr Krugman acknowledges the dangerous trend in the article he wrote, but goes on to say that when sovereign debt crises have occurred in the past, they have almost always been related to developing countries borrowing in foreign currency (as opposed to the US, where nearly all borrowings are in US Dollars).  I will not go into further detail about this except to acknowledge that sovereign defaults have indeed usually been preceded by sharp devaluations in domestic currencies, problematic if a country’s debt has a large percentage denominated in foreign currency (as opposed to local currency).  This is not an issue for the US, as Mr Krugman points out, since almost all US debt is denominated in US Dollars.


  • Mr Krugman does acknowledge nonetheless that spiralling deficits can and should be reined in, and he views the US government’s inability to tackle its spiralling debt as a purely political issue. It is hard to disagree, since Congress creates the budget (and hence crystallises the deficit) which is then approved by the President. Creating a balanced budget is simple on paper, but coming anywhere close to achieving this has proven nearly impossible for Congress, especially as the US becomes increasingly polarised and politicians on the fringes of both parties dig in their heels with no apparent willingness to compromise.  Mr Krugman suggests that the deficit should be reduced by 2.1% of GDP, which is around $600 billion. This could occur by increasing taxes, reducing discretionary expenditures or perhaps – most fairly – by some combination of both. Mr Krugman more pointedly lays the political logjam squarely at the feet of right wing politicians in the Republican Party, a statement that is difficult to refute when politicians on the far right are wanting to increase several expenditure items, including defence, and at the same time wanting to reduce taxes (or extend the 2017 Trump tax cuts). These are not deficit reduction measures and are not at all compatible with reducing the US deficit.  

What can reasonably be done to address spiralling US deficits?

Although simplistic and perhaps to be most equitable (and following Mr Krugman’s logic), a $600 billion reduction in the deficit could be split between revenues and expenditures in a similar ratio to 2023-24 budgeted amounts, meaning roughly $265 billion could come from tax increases and $335 billion could come from reductions in discretionary expenditures.  Reducing the deficit by $600 billion would decrease deficit-to-GDP from around 6% to around 3.5%, still a long ways from a balanced budget but a move in the right direction.  On the revenue side, higher revenues could be achieved by raising taxes on companies or individuals or both, but clearly, the tax increases should be as progressive as possible, meaning those most able to pay (e.g. the wealthy) bear most of the burden.  The likelihood is that curtailing the wild spending of the US would create a drag on US economic growth, but this is the cost of ending the spending spree of the US government. 

From an expense perspective, reductions could be split pro rata between defence and non-defence expenditures.  Such an approach does not jibe with increasing defence expenditures, which is currently being discussed in the House (led by Republicans), or with higher non-defence expenditures that surface regularly in Mr Biden’s plans and among the Democratic caucus in Congress.  So if the deficit needs to be reduced and – at the same time – Democrats and Republicans dig in their heels on their various agenda items – then the full brunt of closing the deficit would need to fall on the tax side of the equation.   Also, the largest US entitlement programs (not subject to annual appropriations) – namely Social Security and Medicare – should be put on the table for reform as the percentage of older Americans increases and people live longer.


How to apportion the requisite amount to reduce the deficit is for the electorate to decide, but one thing that should not be on the table is continuing to increase the deficit by increasing government expenditures and – at the same time – reducing taxes.  You have to consider it in a personal context – no one can spend money they don’t have without eventually getting in trouble.  As a taxpayer, you need to think about it the same way.   And also think hard about political promises to increase expenses without concurrent tax increases – this sways the uninformed portion of the electorate who “hears what they want to hear”.  Promises of more and more spending without raising (or even proposing to decrease) taxes is a formula for continuing to increase the deficit, a burden that could eventually prove problematic for future generations.    


The time needs to be now.  Wake up my fellow-Americans and let’s nip this in the bud by asking our elected officials to stop mortgaging our future.  The US needs to take the right medicine now, and Americans need to stop accepting political promises of higher expenses (regardless of the category) and lower taxes resonating from both parties.  Think about it – ever-higher debt levels could eventually prove unsustainable, and this would have collateral effects on the US that are unpleasant to even contemplate.


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