Why Haven't We Had A Debt Crisis... Yet?

0:00 For as long as most of you have been alive,

0:02 we have been told that federal debt is a major crisis just waiting to happen.

0:06 For more than a quarter of a century at this point,

0:08 we've become very well acquainted with the images

0:11 of this debt clock and the increasingly

0:13 regular government shutdowns where they play

0:15 hot potato with this ballooning hand grenade.

0:17 If all of that wasn't annoying enough,

0:18 there is almost the uniform flip-flop between

0:21 politicians taking turns to be very concerned about

0:23 fiscal responsibility depending on if they are in or out of power at that time.

0:28 I believe we are finally putting America

0:30 on the path towards fiscal reform and fiscal responsibility.

0:33 Republicans in Congress raised the debt three times when

0:37 Donald Trump was president and each time with Democrat support.

0:41 Would anybody ever use that to negotiate with?

0:44 They said absolutely not.

0:45 That's a sacred created.

0:47 He doubled the debt.

0:48 It's a powerful message,

0:50 but they do seem to forget about it pretty quickly once they are in office.

0:54 And fixing it would require actual sacrifice.

0:56 And if we are being honest with ourselves,

0:58 it's almost easy to see where this indifference is coming from.

1:01 We were told we were at an inflection point when we crossed 10 trillion in debt

1:05 and then 20 trillion and now we are approaching

1:08 $40 trillion in debt or 130% of our GDP.

1:11 The rate in which we are taking on new debt is also accelerating.

1:15 Almost half of all of our outstanding borrowing

1:17 has been done in just the last 6 years.

1:20 And yet on the surface, you would be forgiven for thinking not much has changed.

1:24 And I don't just mean that in the sense

1:26 of why haven't we turned into Greece yet?

1:29 Because this also raises a more important question.

1:31 The government has spent $15 trillion more than it has

1:34 brought in in taxes in just the last half decade alone.

1:37 So why don't we feel $15 trillion richer?

1:41 When will this debt actually become a problem?

1:45 It's a record-breaking number that fiscal watchdogs are not celebrating.

1:48 The United States debt surpassed$ 38 trillion.

1:51 The federal government is headed towards a shutdown Friday and Democrats

1:56 and Republicans are still battling over a deal to keep it open.

2:00 The government shutdown is now the second

2:02 longest federal funding lapse in modern history.

2:04 So we are paying today more from the federal budget to just service the debt,

2:08 the interest that we pay on the debt, right?

2:10 It's at 20% of the budget.

2:12 That's a huge number.

2:13 Okay.

2:13 So the federal government has a massive amount of debt

2:17 that has really only been trending in one direction.

2:19 And there are ultimately only six options we have to deal with it.

2:23 We can grow our way out of it.

2:24 We can inflate our way out of it.

2:26 We can raise taxes, cut spending, turn into Japan,

2:29 or continue to kick the can down the road.

2:32 So far, politicians have been promising this first

2:34 option while overwhelmingly relying on this last option.

2:37 And it's important to understand the fundamentals of why

2:40 we can't keep on doing this because I mean,

2:42 it's worked out pretty well for us so far, right?

2:45 As of the time of making this video,

2:47 the USA has never defaulted on its debt repayments,

2:50 although it has gotten shockingly close

2:52 on an increasingly frequent number of occasions.

2:54 But to be fair, a lot of these near misses were crises of our own creation.

2:58 It sounds dumb.

2:59 And to be honest, it is dumb.

3:02 But not many people actually understand the real mechanics of well,

3:05 how this money actually works.

3:07 You may be under the misconception that the national debt has been ticking up

3:11 every second of every day since we last ran our budget surplus back in 2002.

3:15 Sensationalist media reporting and iconography like this debt

3:19 clock certainly haven't helped with that understanding.

3:21 But as an example, our national debt actually shrunk ever

3:24 so slightly between Q4 of 2024 and Q2 of 2025.

3:28 This was because prior to this, the debt ceiling was suspended,

3:32 effectively taking the self-imposed cap off

3:34 how much the government could borrow.

3:36 When that suspension ended on the 1st of January 2025,

3:38 the debt ceiling came back into effect

3:41 and the government found itself already at its credit limit.

3:43 To fill this gap, the government mostly just used

3:46 the money it had sitting around in the Treasury general account.

3:49 There are some technicalities, but really this is effectively just

3:52 the checking account for the federal government.

3:54 It's a big bank account held with the Fed that taxes and other

3:58 federal receipts like tariffs go into and all of the expenses of the government,

4:03 including debt repayments, come out of.

4:04 The Treasury Department releases a daily report of everything that goes

4:08 into this account and everything that comes out of it.

4:10 So, you are welcome to balance the government's checkbook.

4:13 Currently, there is over $900 billion sitting in this account,

4:16 a nearrecord high outside of major events around the pandemic.

4:19 When the debt ceiling was reintroduced last

4:21 year and we temporarily couldn't expand the debt,

4:24 we spent down this account from just over $800

4:27 billion to less than $300 billion over 6 months,

4:29 including a bit of a boost from April tax receipts.

4:32 Today, the debt ceiling has been increased again

4:35 to $41.1 trillion after the passage of the One

4:38 Big Beautiful Bill Act added $5 trillion

4:40 to our credit limit back in July last year.

4:43 In the 3 months that followed that, we had

4:45 already added an additional $1.4 trillion to the debt.

4:48 with some of this extra money going towards topping this account back up.

4:52 Now, it's important to understand these basic financial mechanics because

4:55 one of the most immediate risks that lenders are afraid

4:58 of is what happens if the government doesn't raise the debt

5:00 ceiling and we run out of money in this account.

5:03 We have actually come incredibly close three times in just the last 15 years.

5:08 In 2011, there was political brinkmanship over reducing the deficit.

5:11 In 2013, it was the same threat used

5:13 to push back against the Affordable Care Act.

5:16 And in 2023, Congress once again demanded a cut back

5:19 in government spending or else it would refuse to lift the limit.

5:22 At the climax of the standoff,

5:24 the Treasury had less than $40 billion left in its account.

5:27 Even after taking extraordinary measures

5:29 like delaying payments towards pension accounts,

5:30 there was less than 48 hours of regular spending before the Treasury just

5:34 simply wouldn't have anything left to fund

5:36 the government or pay back its lenders.

5:38 Now, threatening to push the government into default

5:40 in the name of fiscal responsibility is a little

5:42 bit like refusing to pay back your credit

5:44 card because you are starting a new budget.

5:46 The real reason the government plays this dumb game so much

5:49 is because it's a good way for Congress to threaten the president.

5:52 These stunts have had real consequences.

5:54 Because while theoretically the US can technically always cover

5:57 its debt by printing more of its own money, we have demonstrated that we might

6:01 eventually choose not to over political squables.

6:03 The longer we can keep kicking the can down the road,

6:06 the more dangerous these games become.

6:08 Shaking the Jenga Tower gets riskier and riskier the higher we stack it.

6:12 Playing chicken with a debt half the size

6:14 of our GDP wasn't a great idea to begin with.

6:16 Playing the same games with a debt

6:17 level we have today has had real consequences,

6:20 even if it wasn't an outright collapse.

6:22 Following the standoff in 2023,

6:24 our credit rating was downgraded by Fitch from a perfect AAA to a double A plus,

6:29 meaning that federal borrowing was no longer seen as completely risk-free.

6:32 And since then, we have only been downgraded further still.

6:36 To put things into perspective,

6:37 US federal debt is now rated similarly or even lower

6:40 than a lot of mortgage back securities were back in 2007,

6:44 which obviously sounds bad,

6:45 but it's time to learn how money works to find out why this hasn't

6:49 become a crisis yet and how we could fix it before it does.

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7:47 So the actual risk of people holding US

7:50 debt never getting their money back is effectively zero

7:52 because at the end of the day we can ask the Fed to just print more cash.

7:57 But even a small pause in repayments is an indication

8:00 that the government might not have this whole situation under control.

8:03 And since so many systems in the global economy rely

8:06 on using treasuries as effectively an immutable cash flow generator,

8:09 any uncertainty cast out over a lot more than

8:12 just getting an interest payment a few days late.

8:14 The risk to bond holders is not that they

8:16 won't get the money back that they were promised.

8:18 Even if it is delayed, they will get their money back.

8:21 The real risk is that by the time they do,

8:23 the money they receive won't be worth it anymore.

8:26 Either because it's been inflated away or because

8:28 nobody wants to use US dollars anymore.

8:30 If treasuries can't be relied on as the foundation of global financial plumbing,

8:34 that is just one thing that could undermine the expected future value.

8:38 Another risk is that US dollars themselves won't be in demand

8:42 if America becomes a less dominant middleman in the global economy,

8:45 which well, I mean, yeah, that's clearly not an unfounded concern.

8:49 All these potential future problems means that lenders want

8:52 to see higher returns to compensate them for these risks.

8:55 When the Treasury borrows money, it effectively runs a reverse auction.

8:58 It says it needs a certain amount of money and promises

9:01 a higher and higher rate until people agree to give them that money.

9:05 In recent months, as more groups have been

9:07 looking to diversify away from the increasingly questionable dollar,

9:10 these auctions have gone on for a lot longer than we have been used

9:13 to, and we have had to offer a lot more interest than we did in the past.

9:17 On top of interest rates that have also risen as more

9:20 and more of our debt is rolled over onto these higher rates,

9:23 the total amount of money that we are dedicating just

9:26 to covering interest has almost tripled within the last 5 years alone.

9:29 And unfortunately that in turn presents a risk to investors who want

9:33 even higher rates to compensate them for risks posed by higher interest rates.

9:37 We have actually spent a similar portion

9:39 of our GDP on interest payments in the past.

9:42 But that was back in the 1980s when interest rates were as high as 19%.

9:45 The only thing that made this possible was

9:47 the fact that our total debt was a lot lower.

9:50 So even a much higher rate didn't cost as much as today.

9:53 The total debt burden that we are carrying around now means that just a 1%

9:57 increase in interest rates will carve more than 1% of our GDP and repayments.

10:01 If we really are just going to try and kick the can down the road,

10:05 the number one most important thing we can do is

10:07 to make sure that road is as smooth as possible.

10:10 But since we seem utterly incapable of doing

10:12 that, maybe we should explore some other options.

10:15 The best option would to be to grow our way out of the dead.

10:18 And politicians in particular love this idea because it

10:21 is theoretically the option that requires the least sacrifice.

10:24 If you have $20,000 of credit card debt and you make minimum wage,

10:28 well, that's a major problem.

10:29 But the same debt for someone making a quarter

10:31 of a million a year is much less of a concern.

10:34 By working off that same basic assumption,

10:36 if we grow our economy faster than the debt, we can keep things under control.

10:40 The reason this is such a popular idea is

10:42 because economic growth is an objective in the first place.

10:45 And if it lets us handwave away another problem, that is even better.

10:48 No politician really wants to run on the idea of sacrificing hard times.

10:52 So they go full wolf of Wall Street

10:54 and propose dealing with your problems by getting rich.

10:57 Now to be fair, our debt to GDP ratio has actually shrunk over

11:01 the last 5 years from a pandemic high of 132% down to about 121% today.

11:07 It's still not great, but it is at least showing that the economy

11:11 is growing faster than the debt, right?

11:13 Well, yes, that's actually true.

11:15 But there are three problems with this simple assumption.

11:17 The first is that we are measuring economic growth

11:19 and debt from the starting point of the pandemic

11:22 when the economy was locked down and we

11:24 took out massive loans to fund big stimulus programs.

11:26 The second is that by zooming out and observing a more long-term trend,

11:30 it becomes clear that outside of this little anomaly,

11:32 we are still overwhelmingly trending in the wrong direction.

11:35 And finally, this is just measuring the total debt,

11:38 not how much we actually need to pay on it.

11:41 To use the same analogy again,

11:42 $20,000 in credit card debt is a lot worse than a $20,000 mortgage.

11:46 And that's because of the interest rate.

11:48 Because lenders are demanding higher rates from the Treasury

11:51 in conjunction with a higher cash rate from the Fed,

11:54 we are now paying around 4% of our GDP and interest payments alone.

11:57 A 4% GDP growth rate would be considered extremely good and we would need

12:02 to achieve that every year year after

12:04 year just to compensate for the interest payments.

12:07 Now in reality since the year 2000 we have

12:10 actually achieved an average annual growth rate of around 3%.

12:12 And compared to a lot of other countries we are actually doing pretty well.

12:16 So with this much money going to interest alone just growing

12:20 our way out of the debt ain't going to cut it anymore.

12:23 Another option is something that actually seems pretty logical.

12:25 Fire up the money printers and inflate our way out of it.

12:29 Treasuries have a nominal face value

12:30 and most have fixed interest rates with only the exception of a measly $2

12:35 trillion worth of outstanding inflation protected securities.

12:37 If we have the value of our money,

12:39 we could effectively half the value of our debt.

12:42 If you took out a million dollar

12:43 fixed interest loan in Zimbabwe before hyperinflation,

12:45 you would have been able to turn around a year later, sell a loaf of bread,

12:49 and pay off your debt a thousand times over with the proceeds.

12:53 Now, it doesn't need to go that far,

12:55 but if we let our inflation run higher than average for a few years,

12:58 it could bring down the real value of this debt.

13:01 The problem is that this only really works once.

13:04 To lenders, this is almost the same thing as default.

13:06 Remember, their only real risk is that the money they get back from holding

13:10 these bonds isn't worth what they were expecting it to be when they bought it.

13:13 Sustained inflation would help to reduce the burden

13:15 of the current outstanding bonds we have.

13:17 But next time the Treasury goes to borrow more money,

13:20 investors are going to demand even higher rates to compensate

13:22 them for the falling value of the dollar over time.

13:25 Higher thanex expected inflation compared to other economies could also

13:29 further undermine the US dollar as a global reserve currency.

13:32 Not to mention wreak havoc on regular people who

13:35 are already suffering from a cost of living crisis.

13:38 The inflator way our problems by just

13:40 printing more money does sound simple in theory,

13:43 but it will almost certainly do more harm than good.

13:46 So that only leaves us with some of the less fun paths forward.

13:49 The simplest solution of all would be to do

13:52 what anybody would suggest if you have a debt problem.

13:55 Make more money and spend less of what you make.

13:58 In government speak, raise taxes and cut spending.

14:00 Now we try to cut back in spending starting around

14:03 this time last year and overall it did not go great.

14:07 Unfortunately, a lot of our spending is not discretionary.

14:10 So without fundamentally reshaping the rules around pensions or healthcare,

14:14 the government can't directly control how much it spends in these categories.

14:17 Outside of that, the largest expense category is just the interest on our debt.

14:22 And without defaulting, we are stuck with that too.

14:24 The military is the next big expense and this is something we could change.

14:28 But there are two problems with that especially right now.

14:31 The first problem is that we have actually increased our military spending as we

14:35 have simultaneously decided to become more

14:37 isolationist and interventionist at the same time.

14:40 Now we don't need another armchair general.

14:42 But the second problem is something much more within our wheelhouse.

14:46 Military recruitment is way up which may be

14:49 a sign of people wanting to do their patriotic duty.

14:51 But it also may be a sign that young people

14:54 and in particular young men couldn't find a job anywhere else.

14:58 Cutting military funding right now could expose some

15:00 major holes in other parts of the economy.

15:03 We're investing that record number of dollars have

15:06 no choice in the United States armed forces.

15:10 Also creating a lot of jobs, but we're not even doing it for that reason.

15:15 So all right, maybe we just raised taxes, right?

15:18 The one big beautiful bill was one of the largest sweeping tax cuts ever,

15:23 especially for higher income earners and asset owners.

15:25 So that probably wasn't a step in the right direction down this particular path.

15:29 But would it even matter?

15:30 Total federal receipts as in how much the government

15:34 receives in tax and all other forms of revenue

15:36 as a share of GDP has been remarkably

15:39 consistent since the end of the Second World War.

15:41 Even during the 50s and 60s when we

15:43 were taxing top income earners as much as 90%,

15:46 the total revenue we brought in was comparatively identical to today.

15:50 The problem is since then and now

15:52 the spending of the federal government has almost doubled.

15:55 We just have more programs, commitments, and expenses.

15:58 So this data does on the surface support the idea

16:01 that taxes alone aren't going to fix this, right?

16:04 Well, that is true.

16:05 But it's often used to redirect away from the issue of taxation entirely.

16:10 We still tax comparatively little compared to most of our economic peers.

16:14 and who is paying those taxes has changed considerably,

16:17 even if the end result has stayed consistent over time.

16:20 According to IRS statistics, the burden of this revenue has shifted largely onto

16:24 middle inome earners and away from wealthy asset owners.

16:27 These are very taxing taxes that impact

16:29 people with the highest propensity to spend, work, and reinvest when possible.

16:33 Which means this tax shift is likely also shifting the very same economic

16:37 growth that we are still hoping could grow us out of our problems.

16:41 On the flip side, a lot of the extra government spending

16:43 that we are doing is flowing

16:45 more directly to private enterprises through grants,

16:47 contracts, credits, subsidies, bailouts, rebates, partnerships, and guarantees.

16:51 That additional spending going to private institutions

16:53 is captured and passed along to private shareholders.

16:56 Of course, this still happened in the past,

16:58 but the rate at which it is happening has increased.

17:01 The economist Richard V has actually tracked this data

17:04 and found an almost perfect inverse relationship between net

17:07 government spending and net household income with an increasing

17:10 share of that income going to the top percentiles.

17:13 So these asset owners have benefited from an increase in government

17:16 spending while simultaneously contributing less

17:18 to overall stagnant government revenue.

17:20 This is a lot of words to say what you probably already knew,

17:24 which is that wealthy asset owners and companies can afford to pay more taxes,

17:27 which should help to bridge this widening gap and potentially take some

17:30 pressure off workers who have been doing a lot of the heavy lifting.

17:34 Put even more simply, we know that wealthy institutions and individuals

17:37 can afford to finance our current

17:39 budget deficit because they already are financing

17:42 our budget deficit through their investment funds,

17:45 depository institutions, or just private holdings.

17:47 These groups are collectively by far

17:49 the largest net purchasers of government debt with the exception of open market

17:53 operations by the Fed and intragovernment debt.

17:55 If they can find the money to purchase bonds,

17:57 they can find the money to pay taxes.

18:00 Now, the final road that we could go down is ending up like Japan.

18:03 Low growth, low inflation,

18:05 and low interest rates to safely contain a volatile pool of debt.

18:08 This is clearly not ideal, especially for asset owners that won't get to enjoy

18:12 the line going up year after year on average.

18:15 But it could be a lastditch parachute to avoid a wider crisis in the meantime.

18:19 Now, of course, the tragic reality is that we

18:21 aren't going to do any of this until we

18:23 have no other options because it's easier and far

18:26 more popular to just make the future someone else's problem.

18:28 But go and watch this video next to find

18:31 out how it also became a lot more profitable.

18:33 And don't forget to like and subscribe to keep on learning how money works.