An overlooked feature of the explosion in U.S. deficits and debt that’s belatedly grabbing the attention of voters, politicians, and the media: The average American household’s share of federal borrowings is now equal to half the median price of their homes, and the figure is rising fast. Right now, teachers, nurses, store owners, and IT workers (i.e., average Americans) aren’t paying any of the interest on those tens of trillions, since the federal government is simply ramping the IOUs to cover the carrying costs. But that can’t go on forever. America is rapidly reaching the outer limits for the size of budget shortfalls, and the debt burden they amass. “There is a point where the bond markets will no longer be willing to lend Washington the unsustainable amounts it needs to keep financing its debt,” says Jessica Riedl, a senior tax and budget fellow at the Brookings Institution. “At some point, something has to give, and the solution has to be big tax hikes, inflation [itself a hidden form of tax increase], or spending cuts.”
The sea change in U.S. borrowing—from historically high but stable, to gigantic, fast-rising, and alarming—is mainly a post-COVID phenomenon. From the start of 2013 through the close of 2019, the ratio of debt to GDP basically flatlined at around 75%. In other words, what the U.S. owed bondholders and the amount the nation produced in goods and services were rising at about the same rate. After the crisis passed, the U.S. kept spending at far above pre-pandemic norms, creating the growing structural gulf between revenues and expenditures before interest expense, or what’s called the “primary deficit.” The rapid escalation in rates on Treasuries deployed to finance those gaps—the two-year T-bill now yields 3.6%, 16 times its 22 basis point rate in mid-2021—worked in tandem alongside the budget shortfalls to triple interest payments from $352 billion in FY 2021 to $970 billion in FY 2025, putting the debt train on an accelerated track.
From the end of 2019 through mid-January, federal borrowings ballooned from $17 trillion to $30.9 trillion, a jump of 81% or 10.3% annually. Debt as a share of GDP swelled from the mid-70% range to its current level of almost exactly 100%. In other words, in the past six years, Americans’ borrowings have expanded around 40% faster than our national income.
Debt per household has reached staggering levels, and the burden is rising fast
At today’s $30.9 trillion, the U.S. owes $229,000 for each of our 135 million households. If those working families, and not the Treasury via deficit financing, were paying the prevailing 3.36% interest on that debt, they’d be out $7,700 a year in extra taxes. That’s 9% of their $85,000 average incomes. It’s going to get far worse. The General Accounting Office forecasts that the debt will keep outracing GDP so fast that by 2035, the ratio of borrowings to GDP will zoom from today’s 100% to around 135%, almost doubling the dollar figure from $30.9 trillion to roughly $60 trillion.
Owing $60 trillion would also more or less multiply each household’s part by two, to $434,000. That’s higher than the median home prices in America of $410,000, as calculated by the St. Louis Fed. Apply the current interest rate the U.S. is paying of 3.3%-plus, and the “payment,” or effective annual future interest liability, per one- or two-earner family rises to $14,600. Even assuming average incomes wax briskly to hit $100,000 by the end of 2035, that’s a huge chunk, amounting to more than one dollar in seven, before accounting for payroll and income taxes.
We’re not talking about the tax increases needed to balance the budget. If the government decided to collect an extra $14,600 from households, that would simply pay the interest expense on the debt, and hence slow its upward trajectory by curbing one of the largest contributors to the deficits.
It’s extremely unlikely that the U.S. can keep borrowing those interest payments by running ever bigger deficits. At 135% of GDP by 2035, we’d rank among the world’s most dangerously indebted major nations, exceeding where France stands now (113%), equaling Italy’s current number, and even approaching Greece (now 154%).
No recent administration has proposed financing even the interest payments component of the deficit via reductions in expenditures. Hence, a big tax bite looms as the most probable outcome. Put simply, the government is heaping something like a stealth mortgage on America’s households that are already stretched by a costly home loan and the famed “affordability” issues. That “stealth mortgage” keeps accruing interest, hiding for now that it’s today’s workers and their kids who will need to pay. Washington’s maneuvers delay the day of reckoning, but promise to make that reckoning far worse.
