US government debt is now the highest in history.
The last time US debt was this much was during World War II,
when military spending hit record highs.
It's now more than $34 trillion,
and that number keeps climbing.
Our debt could balloon past the point of no return
in 20 years, according to some experts,
and it could send the biggest economy in the world
into a financial crisis.
So how do we get out of this, and what happens if we can't?
I'm Laila Maidan,
and I cover all things investing and money.
We measure debt by comparing US economic output,
so the amount of goods and services we produce each year
by the amount the government owes the public.
Based on this measurement,
we're about 96% debt to GDP.
And what funds the government is taxes
from our economic output.
And those taxes are needed to fund things like schools,
roads, military, social services like Medicare
and Medicaid, Social Security, and even interest on debt.
And when we spend more than we earn, we must borrow,
which means our debt continues to increase,
and now our debt is just skyrocketing.
So how did we get here?
In the early 2000s, debt began to build
because of military spending
with the Afghanistan and Iraq wars.
Then it accelerated with the 2008 financial crisis.
Markets crashed, people lost jobs,
and there were fewer taxpayers.
After that, spending programs ticked up.
And then the 2017 Tax Cuts and Jobs Act
further reduced tax revenue.
And finally, the pandemic hit.
The US needed to borrow even more money
to cover COVID-relief spending programs.
And all of this creates a deficit,
which is when you spend more than you earn,
and you have to borrow the difference.
And this is why the debt continues to accelerate.
So who is the US borrowing money from?
First, we need to understand how it works.
Every time the government needs to borrow money,
it doesn't turn to the bank like you and I.
Instead, it turns to the public market
to borrow money from the public.
Individuals, organizations,
and institutional investors can choose
to lend the government money by buying notes,
Treasurys and bonds.
These can be purchased at banks, brokers,
and from the government itself.
Think of it as a promissory note from the government
that it will pay you back that debt with interest.
That interest is called a yield.
Investors have bought these bonds,
because historically, the US economy and currency
have been strong.
So investors buy them,
because they trust they'll get their money back.
Even though the yield is low, it's just a safe way
to earn a little bit of money on your cash.
But right now, US debt is rising at an alarming rate.
We're borrowing too much, which makes lenders nervous.
When the US borrows more,
it must issue more promissory notes.
But if investors fear that the government
can't keep up with payments,
it begins to be seen as an untrustworthy borrower,
and investors may not be as inclined
to lend the government money, especially at a low yield.
So it won't be as attractive.
So in order to sell debt,
the government will have to raise the yield.
It will pay the public a higher interest
to make that debt attractive to investors once again.
This is where things start to get messy.
If investors can get a low-risk
higher yield from government bonds,
they're less likely to invest in higher-risk places
like the stock market or household debt
like mortgages and car loans.
And so in order to attract these investors back,
the interest rate on debt for you and me also goes up.
One study from the University of Pennsylvania found
that if we continue borrowing at this rate,
we will be past the point of no return in 20 years.
This is because the interest on government debt
would accumulate so much that it would be impossible
to pay it all back.
It's like when you default on your credit card,
because the interest keeps piling up,
and you just can't catch up.
And this is what we can refer to as a credit bubble.
So how do we get out of this?
Well, one way is through an economic boom.
This is how we got out of it after World War II.
The war ended, military spending slowed,
and the US experienced rapid economic growth.
Something similar could happen again.
Some say AI could lead us into increased productivity
and another economic boom.
But some experts believe that this time around,
that's less likely.
We have a large aging population, the baby boomers.
They're going to require Social Security
and healthcare for longer.
Another way out is, well, the government could proceed
to print money to pay back all of that debt.
It sounds like an easy option,
but actually it's a very scary one.
If we increase the supply of money,
this leads to a supply-demand problem,
which makes the dollar less valuable and leads to inflation.
This could seriously shrink the wealth
and purchasing power of people like you and me.
The third way out is, well, the government would really
have to hike taxes to pay for all of this debt.
And those of us who will pick up the bill for that
will be those who are earning an income
in 15 to 20 years from now.
And even then, it might be too late.
And that's why policymakers often engage in negotiations
to raise the debt ceilings,
so that the government can continue borrowing,
so that it could meet its obligations.
Let's face it. It's not likely the US government debt
is going to be paid back anytime soon.
So how can we prepare for this possible looming crisis?
Well, it's hard to say,
but some experts recommend investing in assets
that aren't impacted by inflation
and appreciate at the same time.
Examples include real estate
or certain types of bonds like TIPS or I bonds,
and consider international markets from countries
that have strong balance sheets.
However, it's hard to predict,
because we haven't really been here before.