Morning Commentary: The U.S. National Debt – An Historic Perspective

Foreign Exchange - Morning Commentary

The U.S. National Debt – An Historic Perspective

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The U.S. National Debt hit $22 trillion dollars on Monday. The number is an alarmingly large figure but it barely caused a ripple in the markets or on CNBC or in the WSJ. The national debt has been growing quite rapidly since the end of the Great Recession but has not interrupted the current economic expansion or the ability of the U.S. government to borrow money and function properly.
 
This economic problem began to really surface during the 1980’s but knows no political boundaries as the debt has grown under both Democratic and Republican administrations. Most recently, the debt has grown by $2 trillion since President Trump took office and by $10.6 trillion during the Obama administration as the government took extraordinary measures to support the economy. Wars, recessions, tax cuts, natural disasters, etc. all add to debt and to the deficits. What makes this particularly concerning at this time is that we are experiencing a multi-year economic expansion and we are not at war – deficits and debt usually decline during peacetime and periods of economic growth.
 
Here is a brief history of our national debt:
 
Year                Debt (billions)              Debt/GDP Ratio
1934                $27                              40%                             Depression                 
1945                $260                            114%                           World War II
1957                $271                            57%                             Peacetime
1977                $699                            33%
1986                $2,125                         46%                             Reagan Tax Cuts
2002                $6,228                         57%                             War on Terror, Tax Cuts
2010                $13,562                       90%                             Great Recession        
2019                $22,703 (est.)              108%                           Trump Tax Cuts
 
 
Are there reasons to be concerned? Yes there are.  Here are four reasons for concern down the road. (1) The national debt is taking a larger and larger share of GDP meaning that an increasingly large portion of the government budget is used to service interest. (2) The national debt normally recedes during peacetime and economic recoveries as the government pays down its debt and reloads tools to use during the next downturn. (3) We are increasingly becoming dependent on foreign countries (China, Japan, EZ) to buy our debt and finance our deficits, increasing their influence. (4) Interest rates are historically low and as they rise it will take more of the budget to fund the deficits.
 
For now, the U.S. has been able to manage through these debts and deficits quite easily as the economy continues to grow and there remains an appetite to buy our debt. But in the medium to longer term, we need do a better job of balancing our books without putting a greater burden on future generations.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The big news from overnight that overshadowed almost all other data was the U.S. posting a very disappointing U.S. retail sales number for December and jobless claims coming in much higher than expected. U.S. retail sales for December (prior to the government shutdown) came in at -1.2% against expectations of a gain of 0.1%. This is the biggest drop in more than nine years. Overlaid on top of the retail sales data was jobless claims coming in much higher than expected at 239,000. U.S. interest rates have fallen sharply and U.S. equities have flipped from positive to negative prior to the opening. The DXY is mixed to slightly weaker.
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