US borrowing exceeds GDP: What does it mean for the economy? — This Is America

[0:08] this is america and that is the u.s treasury here the national debt has exceeded gdp for the first [0:13] time since world war ii it costs the government one trillion dollars a year in interest alone [0:19] is the government gambling with the world's largest economy and can it bring that ever [0:23] increasing number under control i'll be back with more on that later but first here's cyril vanier [0:27] in our washington studio alex baird thank you very much the united states is the most indebted [0:34] country in the world almost every year in my lifetime and yours the u.s government has chosen [0:39] to spend more money than it collects sometimes a lot more over decades that builds up and the national [0:45] debt now stands at 39 trillion dollars exceeding the entire u.s economy now that is something we have [0:51] not seen since world war ii is it sustainable u.s president donald trump who has added to the debt [0:57] himself has flagged it as a vulnerability for years we have found over the last seven years we have [1:04] found tremendous wealth right under our feet so good especially when you have 20 trillion in debt [1:10] the obamacare repeal and replace plan would significantly reduce the federal deficit [1:18] when i heard we were going to iraq somebody said oh we're going for the oil 15 trillion dollars that [1:30] does a lot to solve our deficit problem doesn't it growth is the way if we grow like this we go from [1:36] having a 37 36 37 trillion dollars we go from having high debt to low debt i will bring our energy [1:46] companies back they'll be able to compete they'll make money they'll pay off our national debt so 39 [1:54] trillion dollars that number is enough of a concern in the us that it's posted on websites billboards [2:00] and bus stops where everyone can track the debt live alex baird walks us through the number and what it [2:06] means blessed are the young for they shall inherit the national debt that was president hoover in 1936 [2:14] and that blessing per person is getting pretty big keep following our counter in the corner there for [2:18] just how fast that's growing on average but in the meantime let's break down what that number means [2:24] the national debt is similar to a person using a credit card and not paying off the full balance [2:29] each month that means the federal government can pay for services even when it doesn't have money [2:34] and why wouldn't it experts say it's down to an aging population rising health care costs and a tax [2:39] system that doesn't generate enough revenue basically the u.s treasury doesn't have enough [2:44] money to pay the bills right now u.s national debt is so big it's larger than the entire economy of the [2:50] country around one-third of that publicly held debt is owned by foreigners the top three countries [2:56] japan uk and china rest is held here at home mostly by government trust funds big financial institutions [3:03] and the federal reserve they own around one-sixth of that number still ticking away up there but it [3:09] wasn't always that big the u.s has been in debt from the start nearly 250 years ago due to revolutionary [3:17] war costs by 1835 that had all been paid back and that was the last time debt wasn't zero it hit 1 billion [3:24] in 1863 during the civil war 500 billion in the mid 70s and that doubled to a trillion by the 80s since then [3:32] debt has ballooned and fast and in the last couple of years annual interest payments hit one trillion [3:39] dollars it's a lot of money and there's still no plan to actively pay it back instead the government [3:44] repeatedly raises the borrowing limit through congress that's the debt ceiling you hear about [3:49] every couple of years when congress doesn't agree on a budget in time that's when you get a government [3:55] shutdown but if they don't play ball on that debt limit it would be even worse that would be a u.s [4:01] government default that hasn't happened yet but as that number keeps growing so does the fear that [4:07] it could now the national debt's practical impact on americans that's hotly debated by economists its [4:13] most visible consequences are higher borrowing rates and the concern that future generations will end up [4:20] paying the price heidi joe castro reports if you ask the average american about their country's national [4:28] debt few would tell you that is a primary concern but does ask anyone trying to buy a car or a house [4:34] or anything that requires a loan well the interest rate that they pay is linked to the interest rate [4:39] the government pays for its own growing debt i'm going to show you this one house that sold in my neighborhood [4:45] ayana brick house is a real estate agent in springfield virginia she's seen less buying and selling of [4:52] homes as mortgage rates have risen in recent years that's because mortgage interest rates are pushed up [4:58] by treasury yields which are pushed up by the national debt i'm really concerned about it because it means [5:05] that it's it's it's harder for people to buy to see the american dream as an american like part of how [5:13] people have built their wealth is through real estate the national debt can lead to higher borrowing [5:18] costs for loans that touch many aspects of american life and currently the average u.s household debt [5:24] is a hundred and five thousand dollars gail austin lancaster is picking up free food from manna [5:31] a community aid group in maryland she says the u.s economy is in bad shape due to washington's recent [5:36] policies trump and hold on to every cent you can and she worries the national debt will become future [5:44] generations pain president after president has postponed dealing with the problem but eventually [5:50] the u.s will have to raise taxes cut services or default and then my grandkids i'm so sorry for them [5:57] that they're going to have to go through additional challenges as a retired accountant she stresses [6:05] personal fiscal responsibility she wishes the u.s government put more emphasis on the same heidi jo castro [6:13] al jazeera silver spring maryland now joining us now to discuss this economist nicholas loris is [6:19] with us in the studio and jeff ferry is chief economist emeritus at coalition for a prosperous america [6:25] so gentlemen let's start with this um how concerned are you on a scale of one to ten about the u.s [6:33] national debt how worried should we be yeah i'd say it's about a nine i mean when i first started working [6:39] in washington dc 20 years ago it was a concern and it's only gotten worse and i think it's not just [6:45] the fact that we're talking about this hundred percent number of gdp it's really the continued [6:50] trajectory of where we're going if you look at estimates by the congressional budget office [6:56] academia if you look at non-partisan think tanks it's only getting worse and it could be you know as [7:02] high as 117 percent by 2034 it could be up to 120 percent by 2036 in the next decade and then you're [7:10] talking about 176 percent of gdp over the next 30 to 40 years so the trajectory is really concerning [7:19] from a fiscal standpoint jeff ferry what's your level of concern well i wouldn't say it's nine but [7:25] i'd say it's about six or seven and i share many of nicholas's concerns i think you know debt continues [7:33] to grow and it will be a burden that our children or grandchildren will have to pay back at some point [7:40] it'll be a burden for them but i think what worries me most of all is congressional irresponsibility [7:47] i mean we had the biden administration raise the deficit level which adds to the debt each year to [7:53] two trillion a year we now or i should say the democrats did that and now we have the republicans [7:59] who've maintained a two trillion dollar deficit adding to the debt every year and so you know like [8:06] children who are out of control when congress gets in the habit of of raising of designing a budget that [8:13] has a two trillion dollar deficit every single year it's hard to to get them to control it and to [8:20] return to sanity and it's it could take an international crisis to return our government [8:27] to sanity in terms of debt and spending and borrowing and taxation which all go together [8:33] yeah so those are some of the things that we want to explore you both agree that the size of the debt [8:40] relative to the u.s economy is just going to continue to increase and we've asked why that's a problem [8:46] so what are the dangers of allowing the national debt to continue at such a high level is it a [8:52] financial catastrophe waiting to happen yes no we had a nine out of ten six seven out of ten [8:57] what could lead to a tipping point richard gaysford can say considers the issues well if any one of us [9:04] let our finances get out of control ran up a big debt that we couldn't afford to pay back then we'd be [9:09] at risk of losing our homes our businesses and having to fend for ourselves but that's not the case [9:17] for governments that can keep borrowing to cover their expenditure when their income doesn't match [9:23] their outgoings well they might look to cut public spending but far too often they kick that can down [9:30] the road knowing at some point it'll be someone else's problem well with national debt now equating [9:38] to roughly two hundred and eighty eight thousand dollars per household will the u.s ever reach breaking [9:44] point and for how far and for how long can they keep on kicking that can down the road whilst the [9:52] dollar remains the global reserve currency there are plenty of investors wanting to buy it through [9:58] u.s issued bonds but if the world fell out of love with america and its greenbacks well then the [10:05] government would be forced to pay much higher interest rates on its debt that could certainly put a [10:11] squeeze on spending for things like education defense and health in fact the u.s government [10:17] already spends more servicing its debt than it does individually for defense and medicaid [10:24] the non-partisan committee for a responsible federal budget is worried it forecasts that within [10:31] five years the average amount of interest paid to service the national debt could exceed the amount of [10:37] economic growth in the united states and that would lead to a debt spiral well there's widespread [10:44] agreement that that level of u.s national debt is unsustainable but with it forecast to grow to [10:51] a hundred and seventy five percent of the country's economic output within 30 years it seems there's [10:57] still no consensus on how to deal with it they'll keep on kicking that can down the street richard gaseford [11:04] al jazeera washington dc nicholas loris you heard our correspondent there asking the question could [11:11] the u.s ever reach breaking point what what would it take what would cause the u.s to reach breaking [11:16] point what does that even look like yeah it really looks like the bond market saying enough is enough [11:21] and you know as that segment mentioned the world not trusting uh the u.s economy as it continues to do so [11:27] now uh if the bond market you know spirals if interest rates increase if we see kind of runaway [11:33] inflation for the runaway inflation for the uh continuous future uh you know i think that's [11:39] going to bring even more skepticism from the international markets and and if that bond market [11:44] kind of really starts to spiral and uh the international markets say enough is enough that's [11:50] when we really see some sort of fiscal crisis and we're going to have to address a flooded house and so [11:57] what that looks like i think is really um you know catastrophic levels of um economic stagnation if [12:05] if we are ever to get there so you talk about the bond market i want to make sure everybody [12:09] who's watching this follows this means the people who hold the people or the countries who hold u.s [12:14] foreign debt correct that's correct yes um most of that debt is actually held by the u.s government in [12:21] part correct or american your everyday american investor who's going to buy u.s debt and u.s bonds [12:27] and can do that on a minute-to-minute basis right on his app or his his computer screen or through a [12:32] broker yeah and then about a third of it is held by international creditors so you have japan the uk [12:38] china that's what you're referring to correct yeah exactly and so if that market essentially says we [12:42] don't trust the u.s anymore we don't want to hold that debt um what's going to happen for the [12:47] ability to to borrow in the future and the the reality is i don't think economists know when that [12:53] looks like i mean there is projections from wharton you know the business school at university of [12:58] pennsylvania that says that could happen anywhere in the next like 20 to 30 years that are some that [13:03] the projections span out to 2070 when the bond market really starts to take a serious look [13:10] at at a potential crisis and so again we're kicking the can down the road i think that speculation [13:15] and uncertainty leads to even more can kicking and that's what makes this so difficult to deal with [13:20] along with all of the congressional dysfunction that we see in washington dc with how to tackle [13:25] and address this crisis jeff ferry the concern that you expressed earlier was about a possible [13:31] international crisis what did you mean okay i think that the way in which you could see an [13:37] international crisis is that as you suggest as you said about 30 percent of treasury bonds are purchased [13:43] in any given year by foreign investors and a significant number are purchased by american mutual [13:51] funds and hedge funds and financial actors i mean it's not really appropriate to think of individual [13:57] investors as enabling the government to support this 31 trillion dollar debt the debt is supported [14:04] by mutual funds and other kinds of funds all over the world and in my view and you know hedge fund various [14:10] hedge fund managers in new york share this view it typically takes a triggering event for this to [14:16] happen and you know it could be any sort of triggering event it could be a financial event where you know [14:22] the medicaid budget comes in much higher than anybody expected and congress is in a quandary or it could [14:28] be a military event where some country invades an island and the american government decides it's not going [14:35] to defend that island and somebody says the reason is because they can't afford it and then everybody [14:41] then all these funds say treasury bonds are headed for a decline now i need to sell and this is very [14:47] common this sort of panic happens in financial markets other countries have had this problem afflict [14:54] them u.s states in the 19th century had this problem too where they couldn't pay their debts and they [14:59] needed to default if everybody rushes for the door by which i mean everybody tries to sell treasuries [15:04] at the same time and by the way we had a miniature example of this in 2020 i think it was and the fed [15:12] stepped in quietly and actually bought up all the bonds to enable people to rush for the door in my [15:18] metaphor and that averted the crisis because it only took a couple of days of the fed buying up bonds and [15:24] the market returned to normal and that crisis was triggered by covid the covid panic right which [15:30] meant you know if you shut down your economy your tax revenues kind of stop and so so investors had [15:36] that panic fed stepped in and solved that problem then they did very well in that crisis but there [15:43] could be another kind of crisis which could be too big for the fed to handle and once that happens once [15:48] you see um people selling treasuries and interest rates skyrocket when they so this is where you know [15:55] the the guy sitting at home or the the woman the family sitting at home says why does that matter [16:00] to me treasury bond fluctuations well it does because the treasury would then be forced to raise interest [16:06] rates and for example right now you the long-term interest rates around four percent for a 10 year [16:12] so they could easily that could easily in a crisis double to eight percent in which case all sorts of [16:18] interest rates right pause there for a second i want to make sure that everybody follows what you're [16:22] describing is the nightmare scenario where the creditors who currently hold these 39 trillion [16:28] dollars of u.s debt which as we've explained is the same size right now as the u.s economy and over [16:33] time is going to get even bigger than the size of the u.s economy if the people who hold that debt [16:39] countries and people and institutions as you said mostly institutions they suddenly start to sell it [16:44] right continue right if they suddenly if there's a true crisis a real panic and they start to sell [16:51] and the treasury cannot sell the debt except by raising the interest rate on interest rate on the [16:57] debt to six eight ten percent then what then you see all the interest rates in the economy rise you will [17:04] see a recession you will see you will see a panic the the secretary of the treasury will turn around [17:11] to the president and say we can't afford the seven trillion dollar budget right now the only way to get [17:16] people to buy these bonds is to start cutting spending dramatically and that's where the accountant [17:22] woman on your tv segment was right she's an ex-accountant she understands when a panic happens [17:28] you've got to cut spending in an emergency spending on education on military on infrastructure on [17:34] everything that the government spends money on correct and that's where the economy shrinks [17:40] this is the nightmare scenario that we've just kind of detailed nicolas loris is that's possible but do [17:45] you think it's likely you know i think it's becoming increasingly likely as that number grows above 100 [17:51] percent the you know the amount of debt that we have and it continues to grow larger than the economy [17:56] i do think it becomes increasingly likely again i think jeff's exactly right it is some sort of [18:02] triggering event could be kind of the ignition uh for that concern and it is really the federal [18:08] government you know potentially saying we can't afford this we can't pay this right now uh if you look at [18:13] the market response to uh the debt being uh you know the size of the economy the markets didn't [18:19] really move that much um but if there is that you knew it was coming i mean yeah exactly and so yeah [18:25] it's a little bit you know it's not a heart attack it's a little bit like diabetes that we're dealing [18:29] with but that diabetes in this scenario can kind of lead to that heart attack scenario where there's [18:35] this trigger event and then all of a sudden we're dealing with a uh an economy that is in in terrible [18:40] fiscal health so you look at this and i think anybody at this point would be wondering how did [18:45] we get to this i mean if this if this risk which is a major risk it exists we said probably not likely [18:52] at this point but the risk exists how do we get to it it's because the debt is so big 39 trillion [18:57] since the u.s first established its financial foundation in 1790 the country has almost always [19:02] been in debt back then it was only about 71 million dollars look at this graph as you can see over the [19:08] next almost two centuries that debt stays pretty flat it does grow more perhaps than the graphic [19:14] suggests there because of the scale but it grows very slowly then we get to 1980 and that's when [19:20] things change things start to grow exponentially in 1980 the debt at the time is 908 billion dollars [19:26] by 1990 that has more than tripled to 3.2 trillion dollars by 2000 that has almost doubled 2010 it doubles [19:33] again and again by 2020 to almost 27 trillion dollars and in the first half of this decade so [19:40] this brings us to where we are now the national debt has grown by another 11 trillion dollars so [19:46] basically what we're seeing is that since 1980 every decade it doubles or even sometimes triples why what [19:54] happened in the last almost 50 years for that to change yeah well yeah i think a few things and really [20:01] i think if looking at especially at the bush administration in the year 2000 which doesn't [20:06] date back all the way to the 80s but it was like he said we wanted to win the wars at any cost and so [20:11] i think you know the 1980s became kind of like a license to spend a little bit more while realizing [20:18] there wasn't any political repercussions for doing so you know we saw a little bit of that during the [20:24] obama administration years with the tea party movement and wanting to reign in the size of government [20:30] but the reality is these programs continue to grow we you know certainly medicare and medicaid and [20:36] social security continue to grow continue to be a big weight on the national debt and the political [20:42] incentive to really do anything about it becomes diminished and i think there is a little bit of [20:47] a boy cried wolf situation here too is that this debt continued to grow you know politicians some of [20:53] them wave their hands that we need to do something about this the people did and we haven't done anything [20:58] and there hasn't been any financial collapse or any type of economic crisis as a result of the debt [21:04] we've certainly had some issues but not as a result of the debt necessarily and so i do think that the [21:10] american public are still kind of lulled into a sense of comfort and the inability to really worry about [21:15] this as the way that we should be worrying about it so we wanted to look at u.s government spending [21:20] decisions over the last quarter of a century and the biggest driver of debt is the federal budget and [21:25] whether it's in deficit or in surplus now it turns out the last time the federal budget was in surplus [21:30] was 2001 quarter of a century ago under bill clinton since then it does not matter who is president [21:36] republican or democrat bush obama biden trump the budget has always been in deficit that means the [21:42] government is always spending more money than it brings in and notice the two moments on on this graph [21:48] where annual spending really increases sharply first you have 2009 budget deficit reaches almost 1.8 [21:55] trillion dollars and that reflects emergency spending following the 2008 financial crisis [22:00] and another massive deficit after a massive global event that's in 2020 the deficit then exceeds three [22:07] trillion dollars for one year alone and that is the year of the covet pandemic so jeff ferry it turns out [22:13] that you know there's there's your planned spending but then each time there's a crisis whether it's military [22:18] financial a pandemic then governments want to dig deep into their pockets and and debt doesn't really [22:25] matter anymore they're willing to spend whatever it's going to take well i would i would say it's [22:29] a little more complicated than that i think there are two good reasons for governments to run deficit and [22:36] build up debt and those two good reasons are first of all if you're engaged in long-term projects if [22:42] you're building a highway system if you're built if you've got a nasa space program which is a 20-year [22:48] program and you foresee at the end it's going to pay returns then just like a private company would borrow money [22:54] to build a factory it's appropriate for the government to borrow money to build highways [22:59] and bridges and space programs and defense projects if they're going to last for 10 or 20 years [23:05] and many of our defense airplanes and tanks and so on do last for a long time so that part makes [23:10] sense that's good debt you describe as investment investment for the future right it's investment for [23:15] the future the other uh the other occasion is when you have a recession we know from economics that if [23:21] the government spends money during that recession it can boost the economy and speed up the recovery [23:27] from recession and this is often called keynesian economics and a british economist john maynard keynes [23:33] put forward these ideas which were seized on in the 1930s by the roosevelt administration [23:38] now keynes was very emphatic that at the time of um a boom when the recession is over the government [23:46] should cut back spending and not run a deficit and even consider running a surplus the problem is [23:53] these these governments as you pointed out whether it's um really biden and trump are the two worst [23:59] offenders as as nicholas says the bush administration was guilty too but um being a young man as i am [24:06] biden and trump are fresh in my mind and and the problem is they don't grasp that simple logic and [24:13] they and the congress again i come back to politics politicians are too partisan every time a [24:18] republican gets elected they want to cut taxes irrespective of what happens on the spending side [24:24] to get elected and every time a democrat gets elected they want to increase spending without [24:30] thinking about the taxes that are going to pay for that so that's where the source of the problem [24:34] is but as i say in some circumstances deficits make sense and we fought world war ii we invested an [24:41] awful lot of money the roosevelt and the truman administration and debt was then as i think [24:45] you said over a hundred percent but you know that was in 1946 it hit about a hundred percent but within [24:51] a couple of years it came way down because the politicians and the public said yes we have to [24:57] accept higher taxes to pay down this debt and we have to work a little harder for a couple of years [25:02] it's awfully hard for politicians to tell americans they need to work a little harder these days [25:07] nicolas loris we have about a minute left how if the federal government this president or the next [25:13] president wanted to bring down the national debt right if that were his priority how would he or she [25:18] do it yeah in a minute uh you know i think you know it's a really a combination of factors you know [25:24] we do have to get discretionary spending under control i mean we if we don't address medicare medicaid [25:31] and social security and actually look at hard reforms uh it's just never going to happen because [25:36] those three programs alone um are are going to balloon the debt moving forward without structural [25:41] reforms that get it back into place and i think it's gonna so that's cutting government spending [25:45] it's gonna have to be things for sure retirement benefits and health exactly but we have to and i [25:50] think looking at alternative scenarios you know where we're raising the retirement age and the time [25:55] when people can collect social security um looking at more private options i think that we have [26:00] to have those conversations you know especially in the population cycle we're in now with baby boomers [26:06] retiring and younger people having fewer kids this situation especially with regard to social security [26:12] is only going to get worse unless we fix some of that that spending imbalances okay that that's your [26:19] fix that is not the direction of travel i have to say for the the current state of the u.s federal budget [26:25] and the u.s economy because you both pointed out earlier in this discussion that right now [26:29] the debt is projected to continue increasing relative to the size of the u.s economy uh nicholas [26:35] loris thank you very much jeff ferry thank you very much to you as well for joining us both of you [26:39] in the studio today for this discussion and that's all from us here in our washington studio looking at [26:44] whether the ever-growing u.s national debt is sustainable let's go back to alex baird for a taste of [26:49] what's coming on our next edition and then to al jazeera's global headquarters in doha thanks cyril on the [26:57] next edition of this is america redrawing the maps how redistricting efforts could determine if the [27:02] republicans maintain control of the house in november's midterm elections that's thursday [27:07] at 18 30 gmt or 2 30 pm eastern here in the united states bye for now