The debt bomb

This year, the federal debt is on track to exceed the size of the entire U.S. economy.

The United States’ debt-to-GDP ratio rose sharply during the Great Recession of 2008-2009 and has continued to rise, reaching 106 percent in 2019. Last year, the GDP was $21.4 trillion, but it is expected to shrink this year. U.S. debt is projected to exceed about $20 trillion and is growing like kudzu.

While the subject of debt and deficits may be dishwater dull to the average American living unemployment check to unemployment check, consider that the Congressional Budget Office (CBO) has warned that the Social Security Trust Fund will run out of money by 2031. Closely related, Medicare’s hospital insurance trust fund is now on track to run out of money in 2024.

The debt-to-GDP ratio compares a country’s public debt to its gross domestic product. By comparing what a country owes with what it produces, the ratio indicates that country’s ability to pay back its debts.

Debt is eating away at the American economy like a swarm of termites invisibly consuming a house. The fiscal follies continue, with the only certainty being that the accumulated debt will be passed on to future generations and jeopardize their chance to live a prosperous life.

It may be time for Washington to consider a new financing instrument to address America’s debt bomb so future generations have a chance to enjoy greater prosperity once the pandemic is behind us. The issuance of 100-year Treasury bonds to fund ballooning deficits, with the interest income indexed to the CPI as a hedge against inflation, may be an idea whose time has come. It would give the next generation, which has to pay down the debt, a break by locking in rock-bottom interest rates. These bonds may appeal to long-term investors, such as pension funds and insurers and be used to fund infrastructure projects.

Long-term bonds are not unusual. Disney issued 100-year bonds in 1993; Norfolk Southern did so in 2010; and Coca-Cola, IBM, Ford and other companies have done the same. Oxford University, Ohio State, Yale and other universities have done the same. Fourteen Organization for Economic Co-Operation and Development countries have issued debt with maturities ranging from 40 to 100 years. Austria, Belgium, and Ireland have all issued century bonds within the last two years.

With COVID-19 and the economic contraction, the CBO has estimated that the deficit for fiscal year 2020 which ends this month will exceed $3 trillion. According to the Committee for a Responsible Budget, this amounts to around 18 percent of GDP for the year. As things stand, the federal debt is expected to reach 108 percent of GDP by next year.

To put these figures into perspective, the U.S.’s highest debt-to-GDP ratio was 112 percent at the end of World War II. The war was financed with a combination of roughly 40 percent taxes and 60 percent debt.

If the great and the good in Washington don’t address how to reduce the deficit-to-GDP ratio and find a fiscally sustainable path after COVID-19, large debt burdens can slow economic growth, raise interest rates, and lead interest on the debt to consume an ever-large proportion of the federal budget, crowding out spending on other priorities. But there is a trust deficit when it comes to the faith sentient Americans have in Washington’s ability to deal with the issue intelligently.

The only approach politicians can agree on to manage the debt and deficits is to steal from future generations by passing on to them the accumulated debt burden. So much for intergenerational fairness. As Admiral Mike Mullen, the former Chairman of the Joint Chiefs of Staff said: “Our national debt is our biggest national security threat.”

Extraordinary situations call for extraordinary measures and the issuance of 100-year bonds might be one way to deal with intergenerational equity.

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