America’s debt is now larger than the world’s largest economy. President Donald Trump and administration officials have ostensibly given up hope that the $39 trillion national debt – it will reach $40 trillion by the year’s end – will ever be paid off. Instead, the key objective was to bring down the deficit-to-GDP ratio to 3%, achieved by growing the economy and trimming the budget.
America’s Debt Reaches New Milestone
As of May 26, debt held by the public sat at $31.447 trillion, according to the Treasury Department. Though the two terms are often confused for being interchangeable, the gross national debt includes non-marketable trusts funds the government owes to itself, like Social Security. This slightly smaller but still astronomically high number accounts for everything the US government has sold to outside investors to fund its operations. It’s most meaningful when compared to the gross domestic product (GDP), which is currently about $31.22 trillion. Put this altogether, and the debt-to-GDP ratio is above 100% for the first time since World War II.
What’s worse is that the United States is poised to breach the record high of 106% set in 1946, and the situation will likely worsen as Uncle Sam spends more on Medicare, Social Security, and interest payments. The Congressional Budget Office (CBO), in its recent budget and economic outlook, projected that the federal debt held by the public, as a share of GDP, will climb to 120% in 2036 and 175% in 2056.
Unfortunately, there is little reason to expect the circumstances to improve anytime soon. The federal government spends $1.33 for every dollar of revenue it collects, interest accounts for almost a fifth of the $7 trillion budget, and the population is only getting older.
“We’ve heard plenty of alarm bells in the past few years about our fiscal path, but this one rings especially loudly. The real question is whether or not our leaders in Washington will listen,” Maya MacGuineas, president of the independent policy organization Committee for a Responsible Federal Budget, said in a recent statement.
Most Americans do not possess much confidence that policymakers on either side of the political aisle will resolve this fiscal problem. The Peter G. Peterson Foundation’s Fiscal Confidence Index is at its lowest level in two years, and concern spans party lines, with virtually all Democrats, Republicans, and independents worried about the national debt.
Given that the Treasury Department and the bond market anticipate a $2 trillion budget shortfall for the current fiscal year, their lack of confidence is justified. But it does pose a threat to the administration’s economic agenda since deficits and debt drive up interest rates and inflation.
At this stage, only robots will be able to steady the fiscal path.
AI Boom
Artificial intelligence, data centers, and robots are powering the US economy. New Bureau of Economic Analysis data show that business investment is contributing to growth, and it is coming primarily from the continued buildout of AI and the related infrastructure. But while this will continue to leave a footprint in growth prospects, the concern is that the expansion will not be big enough to make a dent in the debt-to-GDP ratio.
The first-quarter GDP growth rate was revised lower to 1.6%, from the initial estimate of 2%. Additionally, the Atlanta Federal Reserve’s GDPNow Model estimate of second-quarter growth was revised downward from 4.3% to 3.6%. This is similar to what happened over the last two quarters.
Big Tech, economists, and policymakers believe that AI will make everyone and the entire world wealthier. Remember what Elon Musk said about abundance and universal high incomes?
“With robotics and AI, this is really the path to abundance for all. People often talk about solving global poverty. How do we give everyone a very high standard of living? The only way to do this is AI and robotics,” Musk said at the World Economic Forum earlier this year, adding that robotics will unleash “an explosion in the global economy.”
If forecasting were easy, everyone would be a millionaire. Perhaps the world’s richest man is correct. Unfortunately, the red ink has grown so much – and unfunded liabilities and obligations are approaching $100 trillion – that it would take obscene amounts of revenue generation and wealth creation to resolve this issue.
$40 Trillion Coming
The national debt, including public and intragovernmental holdings, recently surpassed the $39 trillion milestone. Based on current trends, America’s debt will reach $40 trillion before the country turns the page on the calendar to 2027. A cavalcade of headwinds continues to march toward Washington, from unfunded entitlements to geopolitical conflict, and nobody has a plan to stop it.
