Covid-19 has plagued our country, and the rest of the world, for the last 12 months; but the virus is not the only aspect of the pandemic we Americans should be fearing. Presuming you stay even remotely up to date with news, politics, or financial markets, one of the recurring and dominating headlines of the last year has been stimulus packages, specifically the direct payments to citizens.
Stimulus checks have generally been received well by the people, as they feel the government is doing their job in helping a large sum of the country, despite the fact the government should have never had the power to shut down businesses and places of work in the first place.
But these headlines should not be paraded by citizens; the massive amounts of debt incurred over the last year will negatively affect the same demographic these “relief” bills were meant to help, considering the American public owns roughly 40% of the country’s debt.
Relief bills, looming inflation, and a proposed infrastructure bill have all exacerbated the effects of the national debt and the havoc it can wreak in the very near future. Before I get into the numbers, I will give a brief and simplistic economic explanation for how all of these are linked. In theory, inflation will rise, among other scenarios, when the government decides to print more money.
As we all know, the government has printed trillions in stimulus for the 2020 and 2021 fiscal years to keep our economy afloat, and in printing this money we have simply raised our national debt by the same figure. So, the pandemic caused a dramatic drop in our GDP, spurring the government to pass relief/stimulus bills to keep the economy from truly crashing, which led to trillions of dollars being printed that will be added to our debt, and this will ultimately lead to inflation. Now let’s get into the data.
For the fiscal year of 2019, our nominal GDP increased 4.1% from the year prior to $21.4 trillion and our debt was $23.2 trillion. Now, taking into account the pandemic, which crushed the GDP and inflated spending, we see the figures for 2020 come out to nominal GDP retracting by 2.3% to $20.93 trillion, while debt increased to over $27 trillion.
In other words, the Debt-to-GDP ratio has increased over 19% in the last year, and that’s without accounting for the newly passed stimulus bills and proposed infrastructure bill. Now, it would be unfair to not say this ratio is skewed because of the pandemic, but the fact is these are hard numbers and regardless of what caused them, this is where we currently stand.
A 19% increase in our Debt-to-GDP ratio is extremely worrisome for a singular year, but I want to take this a step further for future years with assumed growth rates in both our GDP and Debt. In the model I built, which took the average growth rate over the last 10 years in both GDP here and Debt here (excluding 2020 because of the black swan event of Covid-19) along with the ending total balances in Debt and GDP for 2020… by 2031 our debt-to-GDP ratio is 2.07, and by 2050, it’s 4.45.
Debt being 445% of the yearly GDP really makes you question what our political officials are doing today to confront this alarming growth in our national debt.
NOTE: The model I used did not take into account many factors like inflation rates (higher inflation makes it easier to pay back our debt)
Our government simply cannot continue to spend money at the rate it currently is. But unfortunately, spending is only increasing. Further spending this year on infrastructure and a newly proposed Covid relief bill will only add to our debt, accelerating us towards the problem faster than we will be able to reasonably handle.
The most infuriating part of this financial crisis is that no media outlets, financial journals, or financial ‘gurus’ seem to be talking about the elephant in the room, but will talk about inflation scares as if the trillions added to our debt this year aren’t a direct cause.
We Americans must educate ourselves on financial issues like these. We must also position ourselves to be financially equipped to handle the devaluation of the dollar. Most importantly, we must elect truly fiscally conservative politicians.