Fisher Investments Reviews Whether the US Government Can Handle Its Debt

Like any debt, the amount the federal government owes matters less than its ability to keep up with the payments. As we’ll explore in this article, the US can comfortably afford debt at current levels. That may change one day, but markets care most about what happens in the next 3 to 30 months. Over that horizon, debt-related fears appear overblown.

US Government Debt

The federal debt is the amount of money the government has borrowed to pay for expenses that federal revenues don’t cover. Primarily, the US government accomplishes this by borrowing money from investors via Treasury bond sales. Given the growth of US government debt over the last several decades, it’s logical to wonder if the US federal government risks defaulting on, or failing to pay, what it owes. Investors, particularly, worry about the impacts to the stock market and the global economy.

Default: The (Low) Risk the US Government Can’t Pay What It Owes

A default is the failure to make interest payments or repay a Treasury bond’s “principal”—the amount borrowed. While the total debt amount appears astronomical, it’s important to consider the other components of the government’s financial picture. For example, the government (via the US Treasury) can issue new debt to refinance maturing bonds. Therefore, the main question is whether it can comfortably continue to make interest payments.

It’s similar to how you’d evaluate your own finances. The amount you owe on a mortgage or auto loan is only problematic if you can’t afford your monthly payments. For example, if your monthly debt payments were $3,000, you’d be in trouble if your monthly income was only $2,000. However, if you brought in $10,000 a month, you could easily afford your debt payments. On this front, the US federal government appears able to easily carry the current debt load.

What’s more, the Treasury can prioritize interest payments over other federal expenditures. So, even with recurring episodes of potential government shutdowns and debt-ceiling debacles, Fisher Investments believes an actual default is incredibly unlikely.

The US Government’s Ability to Pay Its Debts

There are a couple common ways to measure the government’s ability to pay its debt. The first is the cost of that debt, measured by the interest rate the government pays. Fortunately, decades of historically low rates have kept the average interest on US government debt under 5%. That means, until the last couple of years, as old debt matured the government often replaced it with lower-cost debt, helping to keep interest costs manageable.

Another way of measuring the government’s ability to pay what it owes is comparing its current interest payments with its main income stream: tax revenues. Federal interest payments peaked in 1991 at a little over 18% of tax revenue. According to the latest data, that number stands at a little under 15%. While elevated compared to recent years, that figure is still lower than most of the 1980s and 90s—which was a strong period for the US economy and stocks. If the national debt didn’t pose a problem back then, we see no reason it should over the near term.

Who Owns US Debt?

In addition to affordability, it’s important to understand who owns US debt and how much they own. As the following exhibit shows, domestic investors hold the lion’s share at 56%. However, the federal government also has a large share—more than 20%—meaning a substantial portion of the interest the government pays goes back to itself.

Source: US Treasury Department, Bureau of the Public Debt, as of 7/12/2024. Debt held from foreign and US government, the Federal Reserve, and US Investors as of 4/30/2024. For more information, visit Debt to the Penny | U.S. Treasury Fiscal Data.

In recent years, investors have expressed concerns about some international countries’ ownership of US debt—worried they could attempt to manipulate US debt markets. However, no individual country owns a sizeable portion of US debt. The largest, Japan, owns just 3.3% and despite ongoing fears, China owns just 2.3%—hardly a needle-moving amount.

As unwieldy as the federal debt may seem, the government is currently more than able to manage what it owes and its future ability to borrow doesn’t appear threatened. US government debt has undoubtedly risen in recent years, as have the costs of servicing that debt. However, we believe there is likely little impact to the stock market in the near term. US debt could become unmanageable one day. But for now, we think it’s most important to stay focused on your long-term investment goals and keep the US government’s debt in perspective.

Want to Dig Deeper?

In this article, we discussed how US government debt is likely to affect markets and the economy. To hear more about why government debt is an oft-politicized topic and what the interest rate environment is saying about the health of the economy, you can watch our recent video, “Fisher Investments Reviews US National Debt Fears.”

For more market insights from Fisher Investments, read our latest articles.

¹Source: Empire State Realty Trust, “Empire State Building Fact Sheet,” https://www.esbnyc.com/sites/default/files/esb_fact_sheet_4_9_14_4.pdf