00:00U.S. government debt is now the highest in history.
00:04The last time U.S. debt was this much was during World War II, when military spending
00:09hit record highs.
00:10It's now more than $34 trillion, and that number keeps climbing.
00:16Our debt could balloon past the point of no return in 20 years, according to some experts,
00:22and it could send the biggest economy in the world into a financial crisis.
00:27So how do we get out of this, and what happens if we can't?
00:31I'm Leila Maidan, and I cover all things investing and money.
00:35We measure debt by comparing U.S. economic output, so the amount of goods and services
00:40we produce each year, by the amount the government owes the public.
00:44Based on this measurement, we're about 96% debt to GDP.
00:49And what funds the government is taxes from our economic output.
00:54And those taxes are needed to fund things like schools, roads, military, social services
00:59like Medicare and Medicaid, Social Security, and even interest on debt.
01:03And when we spend more than we earn, we must borrow, which means our debt continues to
01:09increase.
01:10And now our debt is just skyrocketing.
01:14So how did we get here?
01:15In the early 2000s, debt began to build because of military spending with the Afghanistan
01:20and Iraq wars.
01:22Then it accelerated with the 2008 financial crisis.
01:26Markets crashed, people lost jobs, and there were fewer taxpayers.
01:30After that, spending programs ticked up, and then the 2017 Tax Cuts and Jobs Act further
01:35reduced tax revenue.
01:37And finally, the pandemic hit.
01:39The U.S. needed to borrow even more money to cover COVID relief spending programs.
01:44And all of this creates a deficit, which is when you spend more than you earn, and you
01:48have to borrow the difference.
01:50And this is why the debt continues to accelerate.
01:53So who is the U.S. borrowing money from?
01:55First, we need to understand how it works.
01:59Every time the government needs to borrow money, it doesn't turn to the bank, like
02:03you and I.
02:04Instead, it turns to the public market, to borrow money from the public.
02:10Individuals, organizations, and institutional investors can choose to lend the government
02:15money by buying notes, treasuries, and bonds.
02:19These can be purchased at banks, brokers, and from the government itself.
02:23Think of it as a promissory note from the government that it will pay you back that
02:28debt with interest.
02:30That interest is called a yield.
02:32Investors have bought these bonds because historically, the U.S. economy and currency
02:36have been strong.
02:37So investors buy them because they trust they'll get their money back, even though the yield
02:42is low.
02:43It's just a safe way to earn a little bit of money on your cash.
02:46But right now, U.S. debt is rising at an alarming rate.
02:50We're borrowing too much, which makes lenders nervous.
02:54When the U.S. borrows more, it must issue more promissory notes.
02:58But if investors fear that the government can't keep up with payments, it begins to
03:02be seen as an untrustworthy borrower.
03:05And investors may not be as inclined to lend the government money, especially at a low
03:10yield, so it won't be as attractive.
03:13So in order to sell debt, the government will have to raise the yield.
03:18It will pay the public a higher interest to make that debt attractive to investors once
03:24again.
03:25This is where things start to get messy.
03:27If investors can get a low-risk, higher yield from government bonds, they're less likely
03:32to invest in higher-risk places like the stock market or household debt, like mortgages and
03:37car loans.
03:38And so in order to attract these investors back, the interest rate on debt for you and
03:43me also goes up.
03:45One study from the University of Pennsylvania found that if we continue borrowing at this
03:50rate, we will be past the point of no return in 20 years.
03:55This is because the interest on government debt would accumulate so much that it would
03:59be impossible to pay it all back.
04:02It's like when you default on your credit card because the interest keeps piling up
04:06and you just can't catch up.
04:08This is what we can refer to as a credit bubble.
04:11So how do we get out of this?
04:13Well, one way is through an economic boom.
04:16This is how we got out of it after World War II.
04:19The war ended, military spending slowed, and the US experienced rapid economic growth.
04:25Something similar could happen again.
04:28Some say AI could lead us into increased productivity and another economic boom.
04:33But some experts believe that this time around, that's less likely.
04:37We have a large aging population, the baby boomers.
04:40They're going to require social security and health care for longer.
04:44Another way out is, well, the government could proceed to print money to pay back all of
04:49that debt.
04:50It sounds like an easy option, but actually it's a very scary one.
04:54If we increase the supply of money, this leads to a supply-demand problem, which makes the
04:59dollar less valuable and leads to inflation.
05:03This could seriously shrink the wealth and purchasing power of people like you and me.
05:08The third way out is, well, the government would really have to hike taxes to pay for
05:13all of this debt.
05:15And those of us who will pick up the bill for that will be those who are earning an
05:18income in 15 to 20 years from now.
05:20And even then, it might be too late.
05:22And that's why policymakers often engage in negotiations to raise the debt ceiling so
05:28that the government can continue borrowing so that it could meet its obligations.
05:32Let's face it, it's not likely the U.S. government debt is going to be paid back any
05:37time soon.
05:38So how can we prepare for this possible looming crisis?
05:41Well, it's hard to say, but some experts recommend investing in assets that aren't
05:46impacted by inflation and appreciate at the same time.
05:50Examples include real estate or certain types of bonds like TIPS or IBONZ and consider international
05:57markets from countries that have strong balance sheets.
06:00However, it's hard to predict because we haven't really been here before.
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