$30.9 trillion.[i] With a T. That is how much the US government owes its creditors. Investors have long fretted US debt, and fear has escalated alongside long-term interest rates’ rise this year—especially with the Fed reducing its holdings of Treasury bonds. The implication: Without the Fed keeping interest rates low, the US’s creditworthiness will crumble, scaring investors and potentially risking default. Yet as Fisher Investments’ review of US debt will show, it is more manageable than that narrative suggests.

US debt looks big in a vacuum, but put it into context. That $30.9 trillion total debt number includes Treasury bonds held by government agencies, including Social Security, known as “intragovernmental debt.” This is money the government owes itself—borrower and creditor cancel each other out. It is, effectively, an accounting entry. Therefore, most analysts rightly focus on “net public debt,” which excludes intragovernmental holdings—that is, debt owned by US and international investors and the Fed. Currently, that number is $24.3 trillion.[ii]

Exhibit 1: US Federal Debt by Holder

Source: US Treasury and Congressional Research Service, as of 09/14/2022. Owners of US government debt on 12/31/2021.

This number is still big, but debt has grown along with the economy. As a percentage of GDP—a measure of annual economic output—US debt is below WWII-era highs, currently 97.6% as of Q2 2022 versus 1946’s 109%.[iii] That figure didn’t presage a debt crisis, and robust 20th-century economic growth helped cut the debt burden relative to the economy. This, despite the fact the total amount of debt, in dollars, never fell.  

That said, Fisher Investments doesn’t think debt-to-GDP (Gross Domestic Product) properly measures debt’s sustainability. The government doesn’t have to pay off all of its debt immediately, and it doesn’t pay off its debt with GDP. Comparing the total level of debt to the annual flow of economic activity, therefore, doesn’t tell you much, in our view.

Instead, look at what the government actually pays: annual interest and principal payments on maturing debt. It pays principal by issuing new debt to refinance maturing bonds—not a problem, based on continued high demand at US Treasury auctions. That leaves interest payments, which the Treasury pays with tax revenue. The US paid $352 billion to service its 2021 debt.[iv] But the Treasury also took in slightly over $4 trillion in revenue. Hence, interest payments represented just 8.7% of revenue.[v] In Fisher Investments’ reviews of market history, we find that ratio has been far larger and didn’t create any problems. For the 1980s and 1990s, interest costs exceeded 10% of revenues, peaking at 18.4% in 1991.[vi] The 1980s and 1990s featured big bull markets and long runs of strong economic growth, including the 1990s’ Tech boom—which coincided with history’s longest bull market. If the US economy and markets could thrive alongside a much higher debt service burden, we doubt debt is problematic for either now.

For debt to become unaffordable, one (or both) of two things would need to happen. Government debt would either need to surge for years or interest rates would have to soar and remain nosebleed-high. Currently, the 10-year US Treasury yield is 3.4%.[vii] While this is up from 2020’s lows and the highest in about 10 years, it is well below the 1980s’ double-digit rates, which didn’t break Uncle Sam.

Exhibit 2: 10-Year US Treasury Rate

Source: Federal Reserve Bank of St. Louis, as of 09/14/2022. 10-year US Treasury yield (constant maturity), daily, January 1962–September 2022.

Moreover, a short interest rate spike wouldn’t much change total costs since most federal debt is set at a fixed rate. Fluctuations in long-term interest rates only matter to newly issued debt. The average weighted maturity of US debt is 72.3 months, meaning it would take years for the bulk of US debt to roll over at hypothetically higher rates.[viii] While possible in the long run, markets don’t move on distant possibilities. Stocks discount probabilities within the next 3–30 months, and Fisher Investments sees few indications US government debt trouble is looming anywhere near that window.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated herein. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

[i] Source: US Treasury, as of 09/12/2022.
[ii] Ibid.
[iii] Source: US Bureau of Economic Analysis and the US Treasury, as of 09/12/2022. US net debt as a percent of US GDP, through Q2 2022.
[iv] Source: Federal Reserve Bank of St. Louis, as of 09/13/2022. Federal outlays through Q4 2021.
[v] Ibid. Federal outlays as a percent of federal receipts through Q4 2021. [vi] Ibid. Federal outlays and federal receipts, 1991.
[vii] Source: Federal Reserve Bank of St. Louis, as of 09/14/2022. Market yield on US Treasury securities at 10-year constant maturity, quoted on an investment basis, 01/02/1962–09/13/2022.
[viii] “Treasury Presentation to TBAC,” Office of Debt Management, 2022 Q1 Report.

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