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The national debt: Time for concern?

Key takeaways

  • The US national debt has recently reached all-time highs relative to gross domestic product (GDP).
  • While the rising national debt may affect markets and the economy in the long term, it is unlikely to have a significant impact in the short term.
  • Investors who are concerned about the rising debt may want to consider diversifying their portfolios with investments such as international stocks and commodities.

Between 2008 and 2020, the debt-to-GDP ratio of the United States rose from about 64% in Q3 of 2008 to an all-time high of 133% in Q2 2020.1 Though it has ebbed a bit in recent years (falling to about 122% in the fourth quarter of 2023), this rapid increase has some investors concerned about the long-term health of the US economy.

Total public debt as a percent of gross domestic product has increased significantly since 2008, reaching an all-time high of 133% in Q2 2020.
Source: Office of Management and Budget, St. Louis Fed. Q1 1966 to Q4 2023. As of 5/9/24.

"In my experience, many voters generally have some level of concern about the national debt," says Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC. "What's different more recently, however, is the very high level of debt that the US has taken on. I can understand why people are concerned."

With the US national debt at such extraordinary levels—and with seemingly no end in sight for deficit spending—is it reasonable to be concerned about the future full faith and credit of the US? To fully appreciate the potential impact that the high-and-rising US debt load could have on the health of the economy, it's important to put that number into the appropriate context. “With a deeper understanding of our national debt situation, I hope that many investors will see that this doesn't appear to be a significant risk for investors," says Malwal. "Nevertheless, it's something worth paying attention to and for elected officials to address over the long term. Investors, however, would likely benefit from getting and staying invested in the markets. That's because growing their wealth over time may allow them to deal with any potential changes that might come about as a result of high levels of national debt."

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How did we get here?

The US national debt represents the money borrowed by the federal government to pay for public services when the cost of those services exceeds what can be paid for by on-hand, available funds. There are many reasons why the government may not have the funds necessary to cover such costs—for example, decreases in tax rates that are not accompanied by proportional reductions in services will result in a deficit that must be covered by borrowing. New or expanded services that are implemented without accompanying offsets or tax increases will have the same effect. Additionally, when individuals and corporations earn less money, they will typically pay less in taxes, which can reduce the pool of funds available to the government.

How do we fix this?

How best to reduce the budget deficits that add to the national debt is a continual topic of debate in Washington DC and may be a part of each party's policy platform in the upcoming 2024 presidential election.

"When debt levels are high, the government has a few tools at their disposal," says Malwal. "At a simple level, they can attempt to increase revenues by raising taxes or cut spending by cutting back on federal programs and services."

60% of government spending is considered mandatory. This category is largely dominated by social insurance programs such as Social Security, Medicare, and Medicaid. The rest is made up of discretionary spending, including spending on national defense (13%), and interest payments.

60% of government spending is considered mandatory. This category is largely dominated by social insurance programs such as Social Security, Medicare, and Medicaid. The rest is made up of discretionary spending, including spending on national defense (13%).
Source: Congressional Budget Office, Fidelity Investments (AART), as of 2/29/24.

Recently, President Biden has proposed shrinking the deficit with an array of tax increases, including raising the corporate income tax rate to 28% and the top marginal tax bracket to 39.6%, while a group of Republicans in the House of Representatives has proposed cutting spending through various means, including raising the Social Security retirement age for future retirees.2

Another way to reduce the debt, according to Malwal, may be through increased economic growth. "If growth picks up and the economy becomes more productive, the resulting increase in tax receipts can be used to pay down the debt. As one example, it's possible that breakthroughs in technology such as artificial intelligence could potentially lead to a more productive economy. It goes to show that there may be several ways out of this situation."

Living within our means?

When the topic of the national debt comes up, it's common to hear it analogized to personal or household debt in an effort to make this complex, often confusing topic more accessible to lay audiences. While it may feel more comfortable, such an analogy can obscure some important differences between personal debt and government debt.

"One significant difference is that, for the government, the list of potential expenses is theoretically infinite," says Malwal. For most individuals and families, the universe of financial goals may be relatively small and, once reached, can be checked off the list: a new car, a new home, education, retirement, and passing on a legacy, for example. For the US government, however, the list will likely never end. "The government is always going to need or want to spend on roads and bridges, airports, the military, or health care," says Malwal. "There will often be other opportunities to invest in."

Additionally, the time horizon of the US government is also far longer than that of an individual. "The government has the luxury of time when it comes to paying down its debt obligations," says Malwal. "Unlike an individual, the government can issue 30-year bonds to raise revenue and then, when those bonds reach maturity, issue another set of 30-year bonds to replace those. So overall, contrasting the government to an individual or a family may not be a helpful comparison."

A manageable situation?

If you're concerned about an imminent economic meltdown due to the rising national debt, Malwal suggests that such a thing is unlikely to come to pass. "The impact of a high debt-to-GDP ratio on the economy is likely a multiyear or even multidecade phenomenon," says Malwal. "If you look around the world, there are many countries with high debt-to-GDP ratios and their economies have not fallen apart. Many have managed to continue to thrive despite their debt load. Increasing debt is not a sign that economic growth is coming to an end; it may simply just point toward a more moderate rate of growth over time."

Compared to 6 other developed nations, the US debt-to-GDP ratio is fairly typical, and even a little below average.
Source: Fidelity Investments Strategic Advisers LLC, International Monetary Fund (IMF) estimates. As of 5/9/24.

What does this mean for investors?

According to Malwal, the national debt situation is unlikely to be an imminent risk for investors. “Looking at stocks that have generally risen over the last 5 years, manageable interest rates, and a strong US dollar, it seems that most global investors are not worried about the health of the US economy or its national debt. In my perspective, the concerns about an imminent collapse or crisis seem somewhat exaggerated."

What investors may see down the road as a result of the rising national debt is higher taxes, reductions in government services due to spending cuts, and higher interest rates. Each of these could potentially affect the markets and the economy, but gradually. “I see each of those things leading to potentially slower economic growth over time," says Malwal. "But the idea that the government would go bankrupt at some point is far-fetched to me. Just because something is possible in theory, doesn't mean it's bound to happen. I believe voters are likely to elect officials to address this situation over the coming years."

What should investors do?

"If an investor is still concerned about the effect that the debt might eventually have on their portfolio, diversification may offer them some protection," says Malwal. He suggests taking a broader view of what a successful investment portfolio might include, by looking beyond the US, to international stocks and commodities.

"The investment team at Strategic Advisers LLC is focused on helping our clients grow their wealth over the long run," says Malwal. "Within well-diversified client accounts, we go beyond just U.S. investments. We also include exposures to international stocks and bonds, commodities, and alternatives. This diversification may help investors through periods of volatility for the U.S. economy."

He specifically warns against reallocating to a large short-term investment position because of concerns around the national debt. The impact of inflation and the loss of potential growth that comes with being out of the market may lead to a more modest standard of living in the future.

"I believe the national debt is an important issue that bears watching and addressing," says Malwal. “At the same time, I do not believe investors need to be overly worried about the market impacts of this situation. In fact, getting and staying invested in a diversified portfolio may give investors a chance to afford the lifestyle that they desire later in life. This may be especially important if taxes and interest rates wind up higher in time, or if there are adjustments to popular government programs for retirees. Having more wealth in the future may help individuals and families better adapt to any changes that may take place over the coming decades."

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More to explore

1. "Federal Debt: Total Public Debt as Percent of Gross Domestic Product," The Federal Reserve of St. Louis. As of 5/9/2024. 2. "Fiscal Sanity to Save America: FY 2025 Budget Proposal," The Republican Study Group. Accessed 5/9/24.

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Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Strategic Advisers LLC (Strategic Advisers) is a registered investment adviser and a Fidelity Investments company.

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