We analyze the worrisome national debt situation in the U.S., UK, and Japan and consider what will determine the likelihood of default
Topics covered include:
- How big is the national debt in the U.S., UK, and Japan
- Why Japan and UK interest rates have increased
- When do federal government debts jump the most
- What two numbers are key to whether a level of national debt is sustainable
- What are five ways indebted countries have reduced the relative size of their debt
- Why quantitative easing is not a solution to a national debt crisis
Show Notes
Debt to the Penny—U.S. Treasury Fiscal Data
Federal Debt and the Debt Limit in 2022—Congressional Research Service
UK government debt and deficit: June 2022—Office for National Statistics
What is the national debt?—U.S. Treasury Fiscal Data
Major Foreign Holder of Treasury Securities—Treasury International Capital System, U.S. Treasury
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Related Episodes
295: Federal Reserve Insolvency and Monetizing the National Debt
338: The National Debt, Inflation, and the U.S. Dollar—What Could Go Wrong?
360: Will the U.S. Default? Debt Ceilings, Government Shutdowns, and the National Debt
433: What Happens If The U.S. Defaults On Its Debt? Here’s Why It Won’t
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 416. It’s titled, “Your Nation’s National Debt: Five Things You Need to Know.”
U.S. National Debt Update
Since 2014, we have released ten episodes on federal government national debt. The last time we looked at the topic in depth was episode 360, in September 2021. We do a lot of episodes on debt, national debt because I’m still learning about it.
My views on national debt have changed moderately over the years as I’ve become more worried about it, as I’ve come to better understand government finances, and central bank finances. And so I thought it would be helpful to review some very important principles when it comes to the national debt because the national debt consists of government bonds that different governments issue, but most of us actually own some of that debt.
The government’s debt is our asset. We’re receiving interest income, and we want to make sure that we get paid back. We also should be very tuned into what is going on with national debt, because the interest rate on that debt can influence the interest rate we pay to borrow to buy a house, for a mortgage or to borrow for a car. Because the government interest rate is sort of the baseline, and then other borrowings are referenced off what the government is paying for debt. And so these are important concepts.
A lot has happened since September 2021, when we last looked at this. For example, the US national debt is $3 trillion higher, approaching $31.4 trillion, which is very close to the debt ceiling. The debt ceiling in the US is the maximum level of government bonds the US Treasury has been authorized by Congress to issue. That debt ceiling will need to be raised this year, and it’s setting up to be a big political fight.
UK National Debt Update
Another thing that has occurred is last fall in the UK the market reaction to the Chancellor’s spending proposal and tax cut was absolutely brutal. Interest rates spiked, and the British Pound Sterling fell to an all-time low at 1.03 pounds to the dollar. Almost at parity.
In December 2021, the yield on the 20-year UK government bond was 0.9%. In early August, it was up to 2.3% as the Bank of England had been raising its policy rate. But then when this whole budget fiasco hit, the yield on the 20-year UK government bond soared to over 5%. It has since eased to around 4.1% as the new UK Chancellor, Jeremy Hunt, announced a revised budget.
These are the type of interest rate moves we can see when bond investors get worried. And the UK government debt, national debt isn’t even that great. It’s two and a half trillion pounds, only about 105% of GDP, or gross domestic product, which is the measure of output, and that’s one of the things that we’ll discuss in this episode. What matters is what is the size of the debt relative to the economy.
Now investors have been worried about the UK government because their public expenditures, public sector expenditures reached over half of GDP, 53%, in 2021. It’s expected to be close to 45% of GDP this year, with a budget deficit to GDP of over 7%. So the debt is growing significantly in the UK.
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