Investing in financial products involves risk to your capital.

Close Navigation
Learn more about IBKR accounts

Is the US national debt a risk to investments?

Posted July 5, 2024 at 10:00 am
Brian Levitt
Invesco US

Key takeaways

Debt not a disaster

While the US national debt is pushing $35 trillion, it isn't necessarily a problem for investors.

Good creditor

The US has more assets than liabilities,1 and much of its debt is domestically owned.2

Captive audience

Investors probably won't lose their appetite for US Treasuries, which are among the safest, most liquid assets in the world.

Is the US national debt really a problem? The total is pushing $35 trillion — over 120% of the country's gross domestic product — and rising quickly. But big numbers don't necessarily suggest a looming disaster or even a problem for investors. The almost $20 trillion in new debt added in the last 15 years may not be bringing us closer to a day of reckoning.3 For many reasons, the debt's reality for investors and Americans overall differs from public perception.

Large deficits typically resulted from recessions and crises

In most years and across most administrations, the US government has spent more than it’s received in taxes, resulting in deficits. These deficits have tended to be significantly larger in the aftermath of recessions and crises. That’s when tax receipts decline and the government spends to stabilize the economy. The 2008 Global Financial Crisis and the 2020 pandemic resulted in unusually large deficits, which subsequently declined as the crises eased.4 It could be argued that the ability of the US government to borrow money and support its citizens during crises prevented economic downturns from becoming even more severe and long-lasting.

Concern about national debt may depend on the metric used

The more than $34 trillion current US debt is greater than the $27 trillion US nominal gross domestic product (GDP).5 Is GDP, the total value produced each year, the right metric for assessing the sustainability of US debt? The US is a very wealthy country. For example, the total US household net worth is over $150 trillion, which is close to five times the size of the nation’s debt.5 From that lens, the debt level may not seem as troubling. It may be one reason to explain why the nation is generally viewed by markets as a good creditor.

The US is a good credit risk

With $34 trillion in liabilities and $200+ trillion in assets, the US federal government has far more assets than many realize.1 Rather than measuring debt as a percentage of GDP, which is primarily an income measure, measuring debt against total assets paints a far more solvent picture. If all the US government land, buildings, and natural resources were combined, the country would likely have more than $200 trillion in assets. While not all are liquid, they certainly paint the US as a much better creditor than many would believe.

US debt has a captive audience

Given that Treasuries are one of the safest and most liquid assets in the world, it’s unlikely investors will lose their appetite for US debt. The federal government owns 20% of US debt, making it the largest single holder.2 Since this debt is just money the government owes itself, however, it has no effect on overall government finances. More than 40% of US debt is owned by US savers, pensions, mutual funds, and financial institutions, who hold Treasuries for safety, yield, policy requirements, or regulatory reasons.2 While it’s true that more than 20% of US debt is held abroad, it’s not heavily concentrated in one country. The largest foreign investors include Japan and the UK, where yields are historically lower than they are in the US. 2

China’s US debt exposure has declined without incident

China is the second largest foreign owner of US debt, but should this concern investors in light of geopolitical tension? Probably not. There’s a notion that China could weaponize US debt by rapidly selling its US Treasury holdings, causing financial instability and a spike in borrowing costs. This risk seems unfounded, as China has been reducing its position in Treasuries for years without disruption to the US debt market.6

Higher interest rates are only a problem if economic growth lags

The US issues debt for a variety of reasons, and theoretically, borrowed funds are put to productive use by the government. Interest expense (%) is the cost of this borrowing, and conceptually, US GDP growth (%) represents the government’s “rate of return.” As long as the rate of return (economic growth) is greater than the borrowing cost (interest expense), the US can pay down its outstanding debt. Currently, growth is higher than interest expense.7

The demographic concern — baby boomers turning 65 — ends soon

Aging baby boomers, one of the largest demographics in the US, were expected to put a financial strain on the country through increased medical costs. This risk hasn’t materialized. Even though a large portion of boomers have reached retirement age, Medicare spending has been much lower than anticipated.8

Social Security isn’t going bankrupt

It’s true that the Social Security trust fund is expected to be depleted in 10 years.9 That’s not bankruptcy, however, despite what the doomsayers might say! Once the trust fund is depleted, Social Security will pay out based on what’s collected in tax revenue. The interest from the trust fund would no longer be available to pay benefits. Given payouts would then be based solely on tax revenue, it’s possible that retirees could potentially be paid less than their full benefits. The nation’s politicians, however, could always adjust the program (for example, raise the retirement age and increase the taxable maximum, to name a few) to prevent retirees from receiving less than what they’d expected.

Originally Posted July 3, 2024

Is the US national debt a risk to investments? by Invesco US

Footnotes

  • Sources: Congressional Research Service, US Energy Information Administration, US Department of Defense, US Treasury, and Bloomberg L.P., as of 12/31/23.
  • Sources: Bloomberg L.P., US Treasury, 12/19/23.
  • Source: US Treasury, 5/31/24.
  • Sources: US Treasury and National Bureau of Economic Research, 11/30/23
  • Sources: US Treasury, US Bureau of Labor Statistics, and US Federal Reserve, 12/31/2023. Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.
  • Sources: Bloomberg L.P., US Treasury, 11/30/23. 
  • Sources: Federal Reserve Bank of St. Louis, US Bureau of Economic Analysis, Bloomberg L.P., 9/30/23. 
  • Sources: Congressional Budget Office, St. Louis Fed, 12/31/22. Medicare spending adjusted for inflation using the Personal Consumption Expenditure Deflator, a measure of how much US households spend on goods and services.
  • Source: Social Security Administration, 2022.

NA3680375

The opinions referenced within are those of the author as of July 2, 2024, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. These comments should not be construed as recommendations but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.

The document contains general information only and doesn’t take into account individual objectives, taxation position, or financial needs or constitute a recommendation of the suitability of any investment strategy for a particular investor. Investors should consult a financial professional before making any investment decisions. Past performance does not guarantee future results.

Disclosure: Invesco US

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s Retail Products and Collective Trust Funds. Institutional Separate Accounts and Separately Managed Accounts are offered by affiliated investment advisers, which provide investment advisory services and do not sell securities. These firms, like Invesco Distributors, Inc., are indirect, wholly owned subsidiaries of Invesco Ltd.

©2024 Invesco Ltd. All rights reserved.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Invesco US and is being posted with its permission. The views expressed in this material are solely those of the author and/or Invesco US and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.