Speaker 1: The United States is currently in twenty seven point five trillion dollars worth of debt. No, that wasn’t a mistake. That wasn’t a slip of the tongue, twenty seven point five dollars trillion. Thirteen years ago, however, that amounts was only 10 trillion dollars. So what’s happened? Why have we almost tripled the amount of debt in such a short period of time? And what are the potential ramifications of this? So one of the obvious reasons, at least for the recent spike in debt, is we’ve had a pandemic. I don’t know if that’s breaking news to any of you guys, but yes, it’s been pretty big. We’ve had businesses shut down. We’ve had people stay at home and not work. There’s been less eating out, less shopping, et cetera. So what did all of this mean? And many people needed money.
No, I can’t work my job. Can I have some stimulus checks? No, my business is failing. I need some liquidity. One of the ways that the government has got this money is borrowing. If we look at the start of 2020, we were in 23 trillion dollars worth of debt. End of the year. That number’s almost at 28 trillion. And, you know, there’s no denying that this was a worthy cause to get a more debt. People needed the money. But the question is, can we afford it? You know, at the end of the day, someone has to pay the debt back, whether you like it or not, whether that be us or we leave it to our kids or they kick the can down the road and they leave it to their kids that they have somewhere to go to pay it. And how this generally gets paid is either through higher taxes or reduced government spending. So they should give you a bit of an overview of the debt situation that we’re looking at, how much debt the government is in, but who are the people that they owe the money to? That’s a good question to ask. So I’ve got a graph that explains that pretty simply. The biggest group is U.S. investors. They own thirty two point five percent of the debt. So that’s people who have bought a long and short term Treasury bills or Treasury inflation protected securities. Whether that’s in there for one K or they’ve directly bought it themselves, it doesn’t matter. They are the largest holders of government debt. The next biggest group is foreign investors who own 29 percent of that debt.
This is led by the Chinese and Japanese investors. They’re by far the largest holders of foreign debt. But then you got countries like Brazil, Ireland, the U.K., Belgium, India. And the interesting one is the Cayman Islands. Those in the know who understand why this is not tax, the next largest holder of U.S. debt is actually the U.S. governments themselves. A bit of a weird one. They own 27 percent of their own debt. You might ask how it’s actually mostly done through Social Security and federal pension funds. Lastly, eleven point two percent of that debt is owned by the Federal Reserve, a.k.a. the Fed, making up the fourth and smallest holder of the debt that we are in. So that was interesting to know who we owe the debt to. Butts of big bucks coming. Can we afford this? Twenty seven point five trillion dollars tripled in 13 years from just 10 trillion not too long ago. Is this too much? Are we in over our heads? Well, there’s a couple of ways that we can measure this. One of the main ways is to compare debt to gross domestic product GDP, a.k.a. how is debt contrasted with how much we are producing every single year? So let’s start by looking at GDP on its own. GDP has actually done extremely well over the past 12 or so years. It’s gone from just over 14 trillion to twenty one point seven trillion dollars.
Obviously, we’ve had a bit of a dip this year and it went slightly down to twenty one point one trillion. However, GDP has not grown nearly as much relative to how much debt is growing by. Just remember, I’ve said this before. Debt has almost tripled in the same amount of time. And that is why when we look at the debt to GDP ratio, it has been doing one thing and that is going up. As you can see, in the past 30 or so years, they’ve always tried to hold that ratio around 50 to 60 percent. So that means debt is around half of the amount we produce every single year. That’s fine. That’s an easy number that’s easily under control. However, 2008, after the great financial crisis, what did we do? We started getting in more debt. We started to borrow more and it started to slip out of our hands a little bit. That debt to GDP ratio went up and up and up in 2008 was 64 percent of GDP. Fast forward to today. It’s 127 percent of GDP. So, you know, if we compare it to our historical percentage, that number is really high right now, OK?
However, the next thing that you can compare it to is other countries debt. How is the U.S. going relative to other major nations in the world? Okay, so China let’s start with China. They have debt to GDP of 55 percent. So that’s less than half of the USA. Germany is 57 per cent. South Korea, 40 per cent Russia. 14 fourteen percent of the U.K., 85 percent, Spain, 96 percent. Those are some examples. So you’ve got most of the big wealthy nations who have less debt than the US, some less than half. However, you do have a few large nations who have big troubles with debt. Japan, they have a debt to GDP ratio of 237 percents. That’s way too much. And we all know what happened to Japan because of debt and leverage. They collapsed economically and they’ve been going terrible for the past 30 or so years. Italy, another country, they’ve got a lot of debt as well, 133 percent of GDP. Venezuela is 214 percent. Greece is one hundred and seventy four percent. And we all know what happens to those two countries. They had a big trouble when it came to their economy and are still having so, you know, looking at the USA, sitting on, what was it, one hundred and twenty seven percent of GDP, I’d say you wouldn’t want to go too much higher in terms of percentage or else you could run into economic problems like Venezuela, like Greece and like Japan back in the day. The next thing that you should look when analyzing this massive debt pile is tax, because that is the main way that the government can pay off the debt and that’s the tax revenue that they bring in the money that comes forward. So right now, the US gets well rounded up, three point five trillion dollars worth of federal tax.
If they did nothing with that tax revenue but spend it on paying off debts, it would still take them seven point eight years to pay the debt fully off. That’s no money spent on Medicare, Medicaid, Social Security, national defense. If all of it went into paying debt, it would still take eight years to pay it off. So that just gives you an idea of how big that debt pile is. Getting to it means one thing in the future, taxes will have to be raised in order to start paying this off and getting it under control. Now, one of the questions you might have is, well, will the debt bubble pop? Is that a risk, you know, that’s been building up for so long, getting so high, will we see that go down in the opposite direction any time soon? Listen, for those who don’t understand, Pop would actually be a good thing if the debt pile popped and the debt pile went down. That’s a positive because it means we’ve got less debt. And let me ask you this. Does anyone see this debt pile being paid off in a medium to large extent? In the short term? No, that’s just not happening. The Fed and the government is focused on using tax for things like stimulus checks and helping out businesses and Medicare and Medicaid. In the short term, the bubble will not pop. It will not get paid off massively.
The real problem we’ve got to watch out for is if it spikes in the other direction. We don’t want to end up like Japan, where they had the lost decade or should I say lost three decades because of excessive debt, excessive borrowing. So what should the US government be doing with that debt pile? I want to tell you guys so that in the future and you can track it and see if they’re doing the right thing, it’s always good to keep social pressure on the governments and not let them get away with doing wrong things, especially with finance. That’s easy for them to get away with it. So first thing, it’s very important that they don’t let this debt balloon up too much. That means increased interest payments and generally results in higher taxes and less government support for future generations. What you really want to do is slowly lighten the debt pile and get it maybe to around 80 percent on par with most other countries. So how can you do this? That’s a good question. The first way is simply by letting time inflation eats away at the debts you see each year, inflation hovers around two percent. That means every year if you do nothing to your debt, it will be worth less, two percent. That’s a very easy way of doing things, but that does require a lot of time and no more deficits. The next thing that the government can do to control debt is raise taxes now. And instead of straight away spending those taxes, you use it to pay what you have borrowed. Another thing that you can do is cut spending less.
Giving away money and forms of national defense or Social Security, whatever it is, instead use that money to pay off the debt pile, because, you know, here’s the problem. When you talk to most people, they say, no, no, no, let’s use taxes for Medicare, Medicaid, Social Security, defense, all of that. Don’t worry about the debt. But at some point, we have to worry about the debt or else we’ll just be leaving it for our kids to pay off or the kids after them. It’s not exactly the nicest present to give the future generation. Imagine a dad before he dies saying, Hey, son, I would have liked to leave you some cash and a house and some stock before I died. But unfortunately, I was terrible with my money. And you’re going to need to pay this debt off for me. There’s only so long before you can keep kicking the can down the road before someone catches it and cuts their hand.
So, yes, OK, I’ll relent slightly, I guess. A global pandemic, it’s an appropriate excuse to keep increasing the debt. But realistically, as soon as this is all over, our debts need to be reduced. I hate to end on a sour note, but somehow I don’t see that happening, though.