00:00 U.S. government debt is now the highest in history.
00:04 The last time U.S. debt was this much was during World War II, when military spending
00:09 hit record highs.
00:10 It's now more than $34 trillion, and that number keeps climbing.
00:16 Our debt could balloon past the point of no return in 20 years, according to some experts,
00:22 and it could send the biggest economy in the world into a financial crisis.
00:27 So how do we get out of this, and what happens if we can't?
00:31 I'm Laila Maidan, and I cover all things investing and money.
00:35 We measure debt by comparing U.S. economic output, so the amount of goods and services
00:40 we produce each year, by the amount the government owes the public.
00:44 Based on this measurement, we're about 96% debt to GDP.
00:49 And what funds the government is taxes from our economic output.
00:54 And those taxes are needed to fund things like schools, roads, military, social services
00:59 like Medicare and Medicaid, Social Security, and even interest on debt.
01:03 And when we spend more than we earn, we must borrow, which means our debt continues to
01:09 increase.
01:10 And now our debt is just skyrocketing.
01:14 So how did we get here?
01:15 In the early 2000s, debt began to build because of military spending with the Afghanistan
01:20 and Iraq wars.
01:22 Then it accelerated with the 2008 financial crisis.
01:26 Markets crashed, people lost jobs, and there were fewer taxpayers.
01:30 After that, spending programs ticked up, and then the 2017 Tax Cuts and Jobs Act further
01:35 reduced tax revenue.
01:37 And finally, the pandemic hit.
01:39 The U.S. needed to borrow even more money to cover COVID relief spending programs.
01:44 And all of this creates a deficit, which is when you spend more than you earn, and you
01:48 have to borrow the difference.
01:49 And this is why the debt continues to accelerate.
01:53 So who is the U.S. borrowing money from?
01:55 First, we need to understand how it works.
01:59 Every time the government needs to borrow money, it doesn't turn to the bank, like
02:03 you and I.
02:04 Instead, it turns to the public market to borrow money from the public.
02:10 Individuals, organizations, and institutional investors can choose to lend the government
02:15 money by buying notes, treasuries, and bonds.
02:19 These can be purchased at banks, brokers, and from the government itself.
02:23 Think of it as a promissory note from the government that it will pay you back that
02:28 debt with interest.
02:30 That interest is called a yield.
02:32 Investors have bought these bonds because historically, the U.S. economy and currency
02:36 have been strong.
02:37 So investors buy them because they trust they'll get their money back.
02:41 Even though the yield is low, it's just a safe way to earn a little bit of money on
02:45 your cash.
02:46 But right now, U.S. debt is rising at an alarming rate.
02:50 We're borrowing too much, which makes lenders nervous.
02:54 When the U.S. borrows more, it must issue more promissory notes.
02:58 But if investors fear that the government can't keep up with payments, it begins to
03:02 be seen as an untrustworthy borrower.
03:05 And investors may not be as inclined to lend the government money, especially at a low
03:10 yield, so it won't be as attractive.
03:13 So in order to sell debt, the government will have to raise the yield.
03:18 It will pay the public a higher interest to make that debt attractive to investors once
03:23 again.
03:25 This is where things start to get messy.
03:27 If investors can get a low-risk, higher yield from government bonds, they're less likely
03:32 to invest in higher-risk places like the stock market or household debt, like mortgages and
03:37 car loans.
03:38 And so in order to attract these investors back, the interest rate on debt for you and
03:43 me also goes up.
03:45 One study from the University of Pennsylvania found that if we continue borrowing at this
03:50 rate, we will be past the point of no return in 20 years.
03:55 This is because the interest on government debt would accumulate so much that it would
03:59 be impossible to pay it all back.
04:02 It's like when you default on your credit card because the interest keeps piling up
04:06 and you just can't catch up.
04:08 And this is what we can refer to as a credit bubble.
04:11 So how do we get out of this?
04:13 Well, one way is through an economic boom.
04:16 This is how we got out of it after World War II.
04:19 The war ended, military spending slowed, and the U.S. experienced rapid economic growth.
04:25 Something similar could happen again.
04:28 Some say AI could lead us into increased productivity and another economic boom.
04:33 But some experts believe that this time around, that's less likely.
04:37 We have a large aging population, the baby boomers.
04:40 They're going to require social security and health care for longer.
04:44 Another way out is, well, the government could proceed to print money to pay back all of
04:49 that debt.
04:50 It sounds like an easy option, but actually it's a very scary one.
04:54 If we increase the supply of money, this leads to a supply-demand problem, which makes the
04:59 dollar less valuable and leads to inflation.
05:03 This could seriously shrink the wealth and purchasing power of people like you and me.
05:08 The third way out is, well, the government would really have to hike taxes to pay for
05:13 all of this debt.
05:15 And those of us who will pick up the bill for that will be those who are earning an
05:18 income in 15 to 20 years from now.
05:20 And even then, it might be too late.
05:22 And that's why policymakers often engage in negotiations to raise the debt ceiling so
05:28 that the government can continue borrowing so that it could meet its obligations.
05:32 Let's face it, it's not likely the US government debt is going to be paid back anytime soon.
05:38 So how can we prepare for this possible looming crisis?
05:41 Well, it's hard to say, but some experts recommend investing in assets that aren't
05:46 impacted by inflation and depreciate at the same time.
05:50 Examples include real estate or certain types of bonds like TIPS or IBONZ, and consider
05:56 international markets from countries that have strong balance sheets.
06:00 However, it's hard to predict because we haven't really been here before.
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