The national debt in the United States has recently soared past $37 trillion, equating to over $323,000 for every taxpayer in the country.
Even more concerning, this $37 trillion represents a debt-to-GDP ratio exceeding 123 percent. In contrast, the ratio stood at just 57 percent in the year 2000, indicating a significant shift in fiscal health.
Back then, federal budget deficits were nearly non-existent, and Washington even experienced a brief period of budget surplus. The Congressional Budget Office (CBO) was optimistic, projecting continued surpluses for many years ahead.
However, that optimism has faded. As we navigate a quarter-century into the new millennium, we are confronted with unprecedented levels of debt and soaring deficits. The Treasury’s monthly statement for the fiscal year 2025, through May 31, reveals a staggering deficit of $1.365 trillion—with four months still remaining in this fiscal year.
This trend likely points to a projected deficit of $2 trillion for the current fiscal year, translating to approximately 6 to 7 percent of GDP, assuming there are no major conflicts or economic downturns to exacerbate the situation.
The past 25 years have clearly witnessed a significant downturn, much of it attributed to self-inflicted challenges. Key contributors include substantial tax cuts, costly military interventions, the 2008 financial crisis, skyrocketing healthcare costs, and the repercussions of the COVID-19 pandemic.
Congress has largely failed in its duty, with politicians from both parties struggling to rein in rampant spending. Democrats, while holding control of both Congress and the White House under President Joe Biden, allowed expenditures to spiral. Republicans, under President Trump, propose increased spending alongside ongoing tax cuts.
This trajectory promises to exacerbate the debt crisis moving forward. Here’s a closer examination of how we arrived at this point…
Runaway Deficits
Former President Bill Clinton, despite his faults, entered office at a fortuitous time, following the end of the Cold War and during a technology-driven economic surge. By the end of his presidency in 2000, the CBO predicted budget surpluses continuing well into the future, estimating a surplus of 4.3 percent of GDP by 2010.
However, the landscape shifted dramatically after 9/11, as President George W. Bush enacted tax cuts while simultaneously funding military operations in Afghanistan and Iraq, leading to renewed annual deficits.
Deficits surged dramatically post the 2008-09 financial crisis. The Obama administration initiated a massive bailout through the American Recovery and Reinvestment Act in 2009. When many of Bush’s tax cuts were extended years later, the CBO’s deficit forecasts began to rise sharply.
Under President Trump, further tax cuts were implemented in 2017, and spending was continually elevated. The COVID-19 pandemic further inflated budget deficits due to sweeping stimulus measures enacted in 2020 and 2021 to mitigate the financial fallout of lockdowns.
While the budget deficit dipped to 3.9 percent of GDP in 2022, it soon spiked again. Increased interest rates, rising Medicaid entitlements, and new clean energy policies introduced by President Biden propelled the deficit to 7.4 percent of GDP in 2023. Current CBO projections estimate deficits nearing 6 percent of GDP through 2035.
The House’s version of President Trump’s One Big Beautiful Bill Act (OBBBA) is projected by the CBO to increase the primary deficit by $2.4 trillion between 2025 and 2034, thereby raising the deficit to 6.8 percent of GDP by 2034.
As national debt and deficits continue to swell, the value of the dollar is likely to diminish accordingly…
Weakening Dollar
Thus far this year, the dollar’s value has dropped by over 10 percent, marking a considerable decline in just six months. While this might seem alarming, it aligns with former President Trump’s trade and reshoring initiatives.
Economists frequently argue that a weaker dollar can enhance U.S. exports, making American goods and services more affordable for foreign buyers. Hence, a depreciated dollar may boost demand for U.S. exports as they become more competitive internationally.
Increased exports can stimulate domestic manufacturing and agriculture, thereby creating jobs. Yet, the downside is that a weaker dollar also raises the cost of imports, which could lead to higher prices for consumers and businesses alike. This rise in costs can contribute to escalating inflation.
Companies that depend heavily on imported materials may find their expenses soaring, passing these costs onto consumers. While this might lead to more manufacturing jobs, it also results in increased costs for a range of goods and services.
Moreover, a persistent decline in the dollar’s value may deter foreign investors. This could lead to decreased demand for U.S. assets and capital outflows, diminishing the ability of trade partners to reinvest dollars into U.S. Treasuries as the trade deficit narrows.
In this manner, we continuously circle back to the critical issues of government debt and deficits…
Examine Your Desires
If foreign investors reduce their Treasury holdings, the pressing question arises: who will finance the gap? If foreign central banks discontinue purchasing Treasuries, how will the government address its debt obligations?
Is there a possibility that Uncle Sam will mandate 401(k) accounts and IRAs to allocate a specific portion to Treasuries, especially as government debt deteriorates at an alarming rate? Could the Federal Reserve rekindle its practice of generating credit to acquire Treasuries?
Only time will reveal the answers.
Currently, a significant standoff over interest rates exists between Trump and Federal Reserve Chair Jerome Powell. Trump advocates for immediate rate cuts to ease Treasury financing, while Powell remains firm in his stance.
In preparation for Powell’s testimony before the House Financial Services Committee, Trump expressed his frustration, referring to Powell as a “Total and Complete Moron!” and outlining his thoughts via an extensive TruthSocial post.
‘“Too Late” Jerome Powell, of the Fed, will be in Congress today in order to explain, among other things, why he is refusing to lower the Rate. Europe has had 10 cuts, we have had ZERO. No inflation, great economy – We should be at least two to three points lower. Would save the USA 800 Billion Dollars Per Year, plus. What a difference this would make. If things later change to the negative, increase the Rate. I hope Congress really works this very dumb, hardheaded person over. We will be paying for his incompetence for many years to come. THE BOARD SHOULD ACTIVATE. MAKE AMERICA GREAT AGAIN!”
During his testimony, Powell asserted that he intends to hold off on rate cuts until he has a clearer understanding of the ramifications of tariff-driven price increases.
At Economic Prism, we acknowledge that neither we nor Powell or Trump can definitively state the right interest rates. This matter is best left to the credit market.
What we do know is that following a low in July 2022, interest rates have entered a long-term upward trend expected to persist until 2060, or even beyond. Any attempt by the Fed to reduce interest rates now would be akin to trying to cool a swimming pool with ice cubes.
If you, like Trump, are eager for rate cuts, it’s wise to consider the potential consequences of such desires…
Powell’s decision to maintain rates may be the only thing preventing the dollar from plummeting completely and stopping significant capital flight.
Should that occur, relying on newly printed money might be the only option left to finance our ballooning debt.
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Sincerely,
MN Gordon
for Economic Prism
