I am going to open with a disclaimer. The topic of National Debt and Deficit is far too complex – and, frankly, enigmatic – for a short post like this one. But, with just the right amount of coffee and time on my hands, someone with my experience and background can fall into the trap of trying to tackle the topic. Also, please understand that reasonable people (even economists, ha ha) can disagree on this topic so please understand the below opinion is only that – and at no point am I making a political statement. But, given where we are at both from a market and economic standpoint, I figured this is a topic I wanted (maybe even needed) to cover. So… ENTER AT YOUR OWN RISK
In the long history of economics, few debates are as enduring—and as polarizing—as the question: Does the national debt and deficit truly matter? It’s a topic that has economists, policymakers, and armchair analysts (me) alike oscillate between alarm and indifference. Some view the mounting debt as a ticking time bomb, while others see it as a manageable aspect of modern fiscal policy. So, which is it? The answer (if there is one), as with many complex issues, lies somewhere in between. With that said… let’s dive into a few of the key arguments on both sides of the aisle, examining the risks, the rationalizations, the global context, and ultimately, why the answer isn’t just a shoulder shrug paired with “only time will tell.” (although, that is a true statement!!)
The Case for Concern: When Debt Becomes a Four-Letter Word
1. Interest Payments
Debt isn’t free—even if it feels like it during times of ultra-low interest rates. The U.S. government pays interest on every dollar it borrows, and with the national debt surpassing $36.5 trillion as of 2025, those interest payments are becoming eye-wateringly large. In fiscal year 2023, the U.S. spent approximately $875 billion just on interest, more than the federal government spent on Medicaid and approaching total defense spending. As interest rates rise (which they have over the past few years even if they are leveling out now), this cost increases. By 2030, it’s projected that interest on the debt could become the single largest item in the federal budget. This is a bit like maxing out your credit cards and discovering your monthly minimum payment is now bigger than your rent or your mortgage.
Unlike discretionary spending (which Congress can adjust), interest payments are non-negotiable. They eat into the budget before a dollar is spent on infrastructure, education, or tax cuts. It’s not the sexiest line item, but it’s the one keeping budget hawks up at night.
(Cited in All That Matters: The National Debt (Or Does It?) by Michael Antonelli and Ross Mayfield, 2/22/2024)
2. Inflationary Pressures
Deficit spending (what we have done every year – regardless of party in power – since 2001) pumps more money into the economy, which can be useful in recessions but dangerous during times of full employment or supply chain bottlenecks. Deficit spending that is “too large” and “too long” can cause inflation to surge. We only need to look back a few years to the early 2020s when pandemic-era stimulus collided with supply shocks, pushing inflation to 40-year highs. Although other factors (like war, shipping snarls, and chip shortages) contributed, critics argued that excessive federal spending added oxygen to the fire. Inflation, typically seen as akin to a regressive tax, hits lower- and middle-income households hardest but impact almost ALL areas of the economy and society. While the Federal Reserve might fight inflation with rate hikes, those very hikes increase the cost of government borrowing—a fiscal Catch-22. (Thank you Joseph Heller for bringing us that phrase as it applies well to this situation)
3. Eroding Confidence in the U.S. (and, specifically, the US dollar)
The U.S. dollar’s status as the world’s reserve currency provides a cushion against many of the risks. As long as foreign investors (including central banks) trust the U.S. Treasury, they’ll keep buying our debt (aka Treasuries), effectively underwriting our deficits. It has been easy to borrow when the lender(s) have complete confidence in the United States.
But, what if these buyers of our debt just… stop? While I am certainly not predicting a run on the dollar tomorrow, persistent political dysfunction, debt ceiling standoffs, and ballooning deficits could eventually undermine global trust. If investors begin to view the U.S. as fiscally irresponsible, they may demand higher yields to compensate for the risk or diversify into other currencies. Although, I must say – it is hard to see what country/group of countries with a currency would be the winner. Regardless of where investment and money would flow, a loss in confidence in the U.S. Treasury/U.S. dollar could send shockwaves through global markets and the domestic economy alike, making everything from borrowing to budgeting far more difficult.
4. Crowding Out
Some economists warn of a phenomenon known as “crowding out,” where government borrowing absorbs a disproportionate share of available credit in financial markets, making it more expensive or difficult for private businesses to borrow and invest. When the Treasury issues more bonds to fund deficits, investors may demand higher yields for an alternative, leading to rising interest rates across the economy. In theory, this deters private investment, reduces capital formation, and slows productivity growth. While recent decades haven’t shown this effect to a devastating degree (thanks, in part, to low global rates), many economists believe it remains a risk, especially if investor appetite for U.S. debt ever wanes. Should rates spike, the economic ripple could hit small businesses, home buyers, and corporate America all at once.
5. Global Comparisons
It should be said that we are not alone in this fiscal irresponsibility. One example, Japan, might be the poster child of high debt tolerance, with a debt-to-GDP ratio exceeding 240%. Although even with a very substantial national debt load, Japan hasn’t faced a fiscal crisis, primarily because the debt is domestically held, interest rates are ultra-low, and the Bank of Japan owns a huge chunk of it. However, Japan also has stagnant economic growth, a rapidly aging population, and deflationary pressure—hardly what the United States should see as a blueprint for American prosperity. Another comparison (although far smaller in scale) is European countries like Greece, Italy, and Portugal who faced genuine crises in the last decade, partly due to high debt and loss of investor confidence. They couldn’t print their own currency (thanks, EU), so fiscal crisis quickly became existential.
The takeaway: Sovereign debt isn’t inherently bad. Context—economic structure, investor trust, currency sovereignty—matters. And, in the case of the U.S., it matters a lot.
The Counterargument: Debt as a Tool, Not a Tyrant
1. A Modern Monetary Theorist’s View
Okay, time to get a bit nerdy… but only briefly. Modern Monetary Theory Economists—the economic school that says (among MANY other concepts) if you control your own currency, you can afford more than you think – argue that governments that borrow in their own currency can never “run out of money” like households or businesses… so why worry? After all, these countries can always create more money. So, the true constraint, according to modern monetary theory, isn’t solvency but inflation.
To skeptics, this sounds like financial sorcery – or, at least sleight of hand. But to advocates, it’s a recognition that deficits are simply accounting entries—money spent into the economy. As long as inflation is under control and the economy isn’t at full capacity, deficits can help boost growth, reduce unemployment, and fund urgent public needs. Of course, once inflation heats up, the modern money theorists would prescribe tax hikes or spending cuts to cool the economy—a politically unpopular recipe that’s easier written than implemented. As an aside, this single point might mark the fundamental shaky foundation of the modern monetary house of cards. After all, who thinks a politician in the U.S. (on either side of the aisle) would push through an unpopular legislation in order for the country to take its medicine?
2. Economic Growth
We can grow our way out of our debt problem. After all, national debt isn’t necessarily a problem if the economy grows faster than the debt. This is how the U.S. managed to reduce its debt-to-GDP ratio after World War II. Despite huge wartime borrowing, the booming post-war economy outpaced debt accumulation. Similarly, productive investments in infrastructure, R&D, and paradigm-shifting technologies can yield economic returns that help reduce the relative burden of debt over time. Borrowing to build an Interstate that fuels commerce is vastly different from borrowing for an extravagant July 4th fireworks show on the mall. If GDP rises, even a growing debt can shrink as a share of the economy—much like how a mortgage becomes less substantial as your income increases.
3. Investor Confidence
For now, it is generally accepted that the U.S. remains the world’s financial bedrock. Treasuries are the safest, most liquid assets on the planet, and demand remains high. Even in crises (especially in crises), investors flock to U.S. debt. And, while I am not sure this analogy works exactly, it does seem to be an economic equivalent of everyone rushing into a burning building because it’s perceived to be the safest place to go. This presumption of unshakable safety allows the U.S. to borrow at low cost and in large quantities without triggering panic. Compare that to emerging markets, where borrowing heavily can quickly spiral into default risk and currency collapse. Moreover, because the U.S. borrows in dollars, it doesn’t face the risk of currency mismatches that crippled countries like Argentina or Turkey. Confidence in the U.S. economy, the U.S. system and the U.S. dollar (right or wrong) is powerful.
4. Policy Flexibility
One of my close personal friends, John Maynard Keynes (world class economist … and underappreciated jazz harpsichordist), argued that deficits are not only tolerable, but necessary during economic downturns. When the private sector pulls back, the government must step in. You could probably argue that was true in 2008… and almost without debate in 2020. It’s like the government is that friend who always picks up the tab when everyone else “forgets” their wallet. Although, as a non-Keynesian might point out… but that “friend picking up the tab” is using the money of those at the others at the table. However, let’s set that aside for now.
Counter-cyclical fiscal policy stabilizes the economy. It reduces the severity of recessions and accelerates recovery. And while this means racking up debt in the short term, it arguably prevents even worse outcomes—like prolonged unemployment, business failures, and deflation. In boom times, Keynes advised, governments should repay debt and save for a rainy day. Unfortunately, in today’s world, political will often falters on that second part. A crucial (fatal?) flaw in Keynes’ position in my view.
Beyond the Binary: Related Issues Worth Considering
1. Intergenerational Equity
One of the most common critiques of debt is that it burdens future generations. But that assumes the borrowed money isn’t used productively. If today’s borrowing funds innovation, for example, the future may be better off, not worse. The real risk is borrowing to cover consumption, not investment. Like using a small business loan to fund a vacation rather than the creation of a new business.
2. Demographics and Entitlements
As Baby Boomers retire, spending on Social Security, Medicare, and Medicaid will climb. It is already and there is no reasonable expectation of that changing any time soon. These programs are not inherently deficit-driven, but they do pressure the budget and could force more borrowing unless reformed. It is also argued that an aging population slows GDP growth, compounding the debt challenge. It’s a macroeconomic double play.
3. Political Dysfunction
As I have already alluded, perhaps the biggest risk isn’t the debt itself but the politics surrounding it. Debt ceiling standoffs, “shutdown” threats, and partisan brinkmanship have shaken confidence more than most economic metrics. And, before you go blaming “the other side”… these are equal opportunity tactics used across both Democrats and Republicans.
The truth – at least as it relates to the market response to economic matters – is that markets crave predictability. The U.S. government (all departments, branches, etc.) adds volatility and uncertainty when it ignores the impact of policy on the budget (annual and cumulative deficit created debt) and can make managing the debt more expensive with debt increases and higher interest rate burden.
So… Does It Matter?
Yes, annual deficits matter. Not so much if it were occasional but year-after-year-after-year… deficits matter. The resulting debt can crowd out investment, fuel inflation, erode confidence, and limit future policy flexibility. Interest payments alone threaten to swamp the budget. And, no, maybe it doesn’t matter—at least not in the way you might think. The U.S. controls its own currency, borrowing costs remain manageable, and strategic deficit spending can be a powerful economic tool. The truth lies in nuance. Fiscal responsibility matters. So does economic agility. The national debt may not be an imminent meteor heading for Earth, but it’s also not a myth. Instead of fearmongering or complacency, perhaps what we need is a smarter conversation—one that distinguishes between good debt and bad debt, and between long-term investments and short-term frivolity. Because at the end of the day, what might matter the most isn’t just the size of the debt, but what we do with it.
Okay, so this week’s Weekly Whiteboard is not exactly uplifting. However, it should also not be seen as a doomsday prediction. We can continue to invest and plan as we have before. Our annual deficits, national debt and general inability to make “take our medicine” political choices are nothing new. We will continue to be aware of both sides of the debt coin. We will continue to keep abreast of policy and economic shifts. We will continue to be aware of macro and geopolitical matters that might impact our investments and our planning. But, more important than all of those – we will continue to be open, transparent, and dedicated to doing the best work we can for (and with) our clients.
