29 Trillion and a Change in the American Psyche

By Charlie Bilello

30 Dec 2021


US National Debt has crossed above $29 trillion for the first time, increasing $6 trillion over the last two years.

As a percentage of economic output (GDP), our national debt has steadily increased over the past 40 years from 31% in 1980 to 126% today…

Why is the ratio going up?

Simply put: we have been borrowing at a faster rate than the economy is growing – for a long time.

Over the last 15 years, the US National Debt has increased at a rate of 8.6% per year versus an increase in US economic growth (nominal GDP) of 3.5% per year.

This has been true during both recessionary and expansionary environments, and both Democratic and Republican administrations.

The one constant has been more debt.

From June 2009 through February 2020, we had the longest economic expansion in US history.

If there was ever a time when a “balanced budget” should have been possible, it would have been during these years.

But the budget was never balanced as there’s simply no appetite for the short-term pain that might come from slowing the borrowing binge. And so, during the longest expansion in US history, the National Debt more than doubled, rising from $11.5 trillion to $23.4 trillion.

When the pandemic recession hit back in March, the immediate solution from both parties was the same: borrow and spend like never before. And then have the Federal Reserve buy much of that new debt in an attempt to keep interest rates from rising.

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With widespread fears of “another Great Depression,” there was almost no pushback against this strategy.

But as the economy recovered, a strange thing happened: the calls for adding more debt and sending out more free money continued, with little opposition.

At the start of 2021, Americans had never been more united on the belief that there was absolutely no downside to borrowing from our children’s and grandchildren’s future so that we could spend more money today.

Source: Pew Research

And so, borrow and spend they did, with more than one hundred million Americans who never lost a job or income during the pandemic receiving a tax-free stimulus check – for the third time.

And the spending continued thereafter, with a $2.77 trillion budget deficit in the 2021 fiscal year, the 2nd largest in history after after 2020.

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Were there any concerns that these actions would have negative repercussions?

Not many. As I wrote back in April

“Memories of the inflationary spiral in the late 1970s and early 1980s have long faded, and the younger generations are not fazed one bit by the prospect of higher prices.

Additionally, we have a Federal Reserve that has explicitly stated that they want higher inflation and will maintain their easy money policies (0% interest rates and trillions in bond purchases) for years to come in an effort to achieve that goal.

Judging by the lack of opposition to additional spending and fiscal/monetary stimulus, the people seem to agree, at least for now. Which suggests that inflationary pressures will have to continue to build before it is viewed as a problem.”

And build they did, with the inflation rate rising from 1.4% at the start of the year to 6.8% today. That’s the highest we’ve seen since 1982.

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With this change in inflation came a dramatic shift in the American psyche, with many people now questioning whether additional stimulus/borrowing/spending is the right course of action.

As a result, the nearly $2 trillion “Build Back Better” plan has been put on hold, with moderate Democratic Senator Joe Manchin from West Virginia saying the following:

“If I can’t go home and explain it to the people of West Virginia, I can’t vote for it. And I cannot vote to continue with this piece of legislation. I just can’t.”

What was the issue? The people of West Virginia are experiencing the harmful effects of inflation firsthand, and they’re not alone. Rising prices are now outpacing the increase in American wages, lowering our purchasing power and standard of living.

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To be sure, this is not to say we’re going to see a balanced budget any time soon. The debt ceiling has been lifted and we’re already at $29.4 trillion, with $30 trillion a certainty in the coming months.

But the idea that we can borrow and spend whatever we want with no negative consequences has been proven demonstrably false. “Free money” isn’t free. There’s a cost to everything, even if you can’t see it at first.

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About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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