The US debt is skyrocketing to unprecedented levels not seen since World War II. Our investing correspondent explains how we got there and how this looming financial crisis could impact you.
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00:00U.S. government debt is now the highest in history.
00:04The last time U.S. debt was this much was during World War II, when military spending
00:09hit record highs.
00:10It's now more than $34 trillion, and that number keeps climbing.
00:16Our debt could balloon past the point of no return in 20 years, according to some experts,
00:22and it could send the biggest economy in the world into a financial crisis.
00:27So how do we get out of this, and what happens if we can't?
00:31I'm Leila Maidan, and I cover all things investing and money.
00:35We measure debt by comparing U.S. economic output, so the amount of goods and services
00:40we produce each year, by the amount the government owes the public.
00:44Based on this measurement, we're about 96% debt to GDP.
00:49And what funds the government is taxes from our economic output.
00:54And those taxes are needed to fund things like schools, roads, military, social services
00:59like Medicare and Medicaid, Social Security, and even interest on debt.
01:03And when we spend more than we earn, we must borrow, which means our debt continues to
01:09increase.
01:10And now our debt is just skyrocketing.
01:14So how did we get here?
01:15In the early 2000s, debt began to build because of military spending with the Afghanistan
01:20and Iraq wars.
01:22Then it accelerated with the 2008 financial crisis.
01:26Markets crashed, people lost jobs, and there were fewer taxpayers.
01:30After that, spending programs ticked up, and then the 2017 Tax Cuts and Jobs Act further
01:35reduced tax revenue.
01:37And finally, the pandemic hit.
01:39The U.S. needed to borrow even more money to cover COVID relief spending programs.
01:44And all of this creates a deficit, which is when you spend more than you earn, and you
01:48have to borrow the difference.
01:50And this is why the debt continues to accelerate.
01:53So who is the U.S. borrowing money from?
01:55First, we need to understand how it works.
01:59Every time the government needs to borrow money, it doesn't turn to the bank, like
02:03you and I.
02:04Instead, it turns to the public market, to borrow money from the public.
02:10Individuals, organizations, and institutional investors can choose to lend the government
02:15money by buying notes, treasuries, and bonds.
02:19These can be purchased at banks, brokers, and from the government itself.
02:23Think of it as a promissory note from the government that it will pay you back that
02:28debt with interest.
02:30That interest is called a yield.
02:32Investors have bought these bonds because historically, the U.S. economy and currency
02:36have been strong.
02:37So investors buy them because they trust they'll get their money back, even though the yield
02:42is low.
02:43It's just a safe way to earn a little bit of money on your cash.
02:46But right now, U.S. debt is rising at an alarming rate.
02:50We're borrowing too much, which makes lenders nervous.
02:54When the U.S. borrows more, it must issue more promissory notes.
02:58But if investors fear that the government can't keep up with payments, it begins to
03:02be seen as an untrustworthy borrower.
03:05And investors may not be as inclined to lend the government money, especially at a low
03:10yield, so it won't be as attractive.
03:13So in order to sell debt, the government will have to raise the yield.
03:18It will pay the public a higher interest to make that debt attractive to investors once
03:24again.
03:25This is where things start to get messy.
03:27If investors can get a low-risk, higher yield from government bonds, they're less likely
03:32to invest in higher-risk places like the stock market or household debt, like mortgages and
03:37car loans.
03:38And so in order to attract these investors back, the interest rate on debt for you and
03:43me also goes up.
03:45One study from the University of Pennsylvania found that if we continue borrowing at this
03:50rate, we will be past the point of no return in 20 years.
03:55This is because the interest on government debt would accumulate so much that it would
03:59be impossible to pay it all back.
04:02It's like when you default on your credit card because the interest keeps piling up
04:06and you just can't catch up.
04:08This is what we can refer to as a credit bubble.
04:11So how do we get out of this?
04:13Well, one way is through an economic boom.
04:16This is how we got out of it after World War II.
04:19The war ended, military spending slowed, and the US experienced rapid economic growth.
04:25Something similar could happen again.
04:28Some say AI could lead us into increased productivity and another economic boom.
04:33But some experts believe that this time around, that's less likely.
04:37We have a large aging population, the baby boomers.
04:40They're going to require social security and health care for longer.
04:44Another way out is, well, the government could proceed to print money to pay back all of
04:49that debt.
04:50It sounds like an easy option, but actually it's a very scary one.
04:54If we increase the supply of money, this leads to a supply-demand problem, which makes the
04:59dollar less valuable and leads to inflation.
05:03This could seriously shrink the wealth and purchasing power of people like you and me.
05:08The third way out is, well, the government would really have to hike taxes to pay for
05:13all of this debt.
05:15And those of us who will pick up the bill for that will be those who are earning an
05:18income in 15 to 20 years from now.
05:20And even then, it might be too late.
05:22And that's why policymakers often engage in negotiations to raise the debt ceiling so
05:28that the government can continue borrowing so that it could meet its obligations.
05:32Let's face it, it's not likely the U.S. government debt is going to be paid back any
05:37time soon.
05:38So how can we prepare for this possible looming crisis?
05:41Well, it's hard to say, but some experts recommend investing in assets that aren't
05:46impacted by inflation and appreciate at the same time.
05:50Examples include real estate or certain types of bonds like TIPS or IBONZ and consider international
05:57markets from countries that have strong balance sheets.
06:00However, it's hard to predict because we haven't really been here before.