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Markets and Economy

Does the US Have a Debt Problem?

While there’s typically a negative stigma associated with debt, that’s not necessarily the case when it comes to the US government’s balance sheet. In fact, there appears to be plenty of positives when examining the nation’s current financial situation.
Jim Glassman, Head Economist, Commercial Banking
May 31, 2017

The US national balance sheet is dominated by overseas creditors. Foreign investors hold $32 trillion in US assets, while Americans hold just $23.9 trillion in assets abroad, according to the Bureau of Economic Analysis. The bureau also found that, on balance, Americans owe about $8 trillion to the rest of the world. While this is a massive sum, a closer examination of the national balance sheet reveals positive indicators.

America’s Financial Strength

Debt is often viewed as a crisis, and it’s easy to imagine the US government in the same position as an underwater homeowner, scrambling to pay the monthly minimum to creditors while holding few real assets.

However, the country’s true financial position is relatively strong. In 4Q 2016, the Federal Reserve estimated the nation’s total net wealth at $92.8 trillion, with GDP of about $18.9 trillion. The federal deficit is at a relatively sustainable 3.16 percent of GDP, and the average household’s debt burden is at an all-time low, thanks to rising asset values and historically low interest rates. From this perspective, the US looks less like a homeowner struggling to pay its monthly bills and more like one that’s taken out a modest line of equity.

The Asset Mix

Some might ask: If the US is so prosperous, why are we relying on foreign investors to finance $8 trillion of our debt? Breaking down the country’s balance sheet into components shows that foreign investors are pursuing low-risk, low-return investments in the US, while their American counterparts are more interested in buying equity in rapidly growing ventures overseas.

The mismatch is greatest in government debt. Foreign investors hold approximately $7 trillion more in US securities portfolios than US investors hold in foreign government securities. Overseas creditors have also parked approximately $3 trillion in US currency and demand deposits, while Americans only hold about $1.6 trillion in foreign cash and demand deposits.

Yet US investors hold about $500 billion more in foreign venture equity shares, which typically offer higher returns than government bonds. In fact, despite the country’s total indebtedness, US investors actually earn more on their overseas investments than foreign investors do on their American holdings.

This reflects investors’ motivations: Americans are seeking out opportunities for higher growth abroad, whereas foreign funds are moving into secure US government debt. Developing nations with export-oriented economies will naturally run trade surpluses, and it is neither surprising nor alarming that these surpluses are driving up demand for long-term, low-risk investments.

Weighing Opportunity Costs

Criticism of debt often ignores counterfactual scenarios, failing to weigh the opportunities that borrowing can enable. Many people were alarmed by the ballooning national deficit during the recession, but had the federal government truly “lived within its means” when tax revenues began to fall, vital safety net programs would’ve been cut. Instead, a debt-financed stimulus bill helped blunt the worst of the downturn and hasten the recovery. Eight years later, the country appears to be in a stronger position to pay back those debts.

Debt as an Investment

Borrowing should be viewed as an investment—all debts must be paid, but if the money can be used to build greater wealth, taking on debt can be worthwhile. For example, if infrastructure spending were viewed as an investment, there would likely be fewer objections to debt financing for high-return projects. If roads are built where they’re most needed, the investment in infrastructure eventually pays for itself by promoting future growth.

Excessive debt can be a straightjacket, but borrowing can also be a stepping stone toward a more prosperous future. Instead of worrying about America’s total volume of debt—or who our creditors are—we should encourage wise spending decisions that lay the foundation for building wealth over the long term.

View our economic commentary disclaimer.



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