Interest Rates Could Snowball as US Debt Begins to “Spiral”

Dave:
Let’s talk about the national debt. It has been a big topic and a big problem for a long, long time, but in recent weeks it’s been making more and more news and fears of the ever increasing debt are starting to have real life impacts on the economy and the risk for potential impacts is growing more and more. So today we’re doing a deep dive into how the national debt impacts everyday people and investors. Hey everyone, it’s Dave Meyer. Welcome to On the Market. Thank you all so much for being here. You may notice if you’re watching this on YouTube, don’t have the usual background going on right now. I moved into my new house just a couple of days ago, so please bear with me while I rebuild my studio. But hopefully our video and audio quality are all fine for our big topic today.
’cause today’s topic is really important. The national debt, you’ve probably heard about it, you probably know that we got a lot of it. We have a lot of debt in this country, but I’m not sure everyone fully understands what it means that we have this large national debt and how this actually might play out logistically in the lives of ordinary Americans. And specifically how this could impact real estate investors and the housing market. Because I think as real estate investors, we typically, most of us know something about debt of real estate is a highly leveraged asset class. Most of us use mortgages in one shape or form during our investing career. And we know that debt can actually be used beneficially when it’s done in a responsible way, but debt can also be quite risky. So today I’m not just gonna be talking about sort of like the big picture number of how much debt we’re in.
You could look that up. I’m going to instead give you a little bit more history on how we got to where we are today, what’s happening in the current environment and how a ballooning national debt could spill into the everyday lives of us in the future. So let’s jump into this thing and we’re gonna start first and foremost with just what is the debt? Let’s just get that number out of the way. It is, as of right now, $36 trillion approximately, and this is a wildly huge number. I think a lot of times, especially in recent years, we get used to talking about numbers like trillions of dollars. That’s not normal. That is an enormous amount of money that we have $36 trillion. Just to put this in context, the gross domestic product, the GDP of the United States, basically the entire economy, the size of the entire US economy in one year is $29 trillion.
So if you’re doing the math in your head, you probably noticed that our debt is now bigger than the entire GDP, the entire economic output of the entire country for one year. So that’s where we’re at. But in a vacuum, just knowing $36 trillion doesn’t really help. So let’s just dig into this thing and hear what it actually means. So first and foremost, let’s just talk about like how this even claimed to be like how do we have so much debt? The fact is that the government of the United States is like most people, they can borrow money and the government does this a little bit differently. They’re not, you know, using credit cards or taking out mortgages. They do this in the form of issuing bonds. So you might hear this is called bonds or treasuries, kinda the same thing. Basically the government goes out and asks investors, do you want to lend money to the US government?
And there are auctions and basically people bid on these treasuries. So when you hear that concept, if you hear a bond or a treasury, that’s basically what’s going on. It’s basically an investor lending money to the US government. It’s not all that different from a mortgage where a bank is lending money to someone to go buy a house. When you buy a bond or you buy a treasury, what you’re actually doing is lending money to the US government and the government has to pay back that loan over time with interest. And they do this in different formats. You might hear of 30 year treasuries. The one we talk about most of the time on the show and is most relevant to real estate investor is the 10 year treasury. There are short term treasuries, but all of these things are the basic same thing. It is the US government borrowing money from investors.
And when I say investors, that could be you or me. It could be a big institution, it could be a hedge fund, it could be a foreign government. All of those count as bond investors. But whenever you hear the idea of treasuries, it’s someone lending money to the US government. So that’s the national debt and it it worth mentioning that the US is hardly the only country that has a large national debt. There are different countries have different philosophies about this, but it is not unusual for the United States to have some amount of debt. And economists generally debate how much debt is responsible and possible. But just going back in time in the United States, we’ve pretty much always had some level of national debt. So as I said, our debt is big though right now relative to historical averages and there are different ways to measure this.
So one of the way I’m gonna use in this episode is just relating the size of our debt to GDP, our gross domestic product. Right now it’s at 128%. So it is bigger than GDP. I think it’s kind of helpful to compare this to another time where our debt was this big using this metric which was right after World War ii and maybe that doesn’t strike you as odd. It does to me though because wartime is usually when you know the governments of any country, not just the US issues debt because they have a lot of things to pay for during war that is an emergency, right? And so you are willing to spend more than you earn during that time because you need to go win that war. But right now we are not in wartime. And so the fact that we have this GDP is notable and we’ll get to what that all means in a minute.
But another important metric here when we talk about the debt is not just how it relates to GDP, but it’s just how much interest we’re paying. If you’re a real estate investor, you know that principal and interest is one of your biggest expenses. And in the US the interest just on our national debt is rapidly becoming one of the biggest sources of expenses for the entire US government. So when you look at how much interest we’re paying, again, this is a loan so we have to pay interest to our lenders. The United States back in 2020 was paying $345 billion a year in interest. That’s a lot. 345 billion, that’s a third of a trillion dollars. But fast forward to 2024 last year, just four years later, it’s up to almost $900 billion just in interest. That is money that is not being put to use on any sort of spending or really any productive use other than paying back interest.
And again, some level of debt can be beneficial but obviously this is a very large number When we talk about how much the US is spending on interest at this point, when you look at it, it’s actually quite interesting to look at sort of the budget and how much money is going towards interest payments. And you can see that the big buckets are still Medicare, Medicaid and social security. That makes up about 50% just roughly, I’m gonna use round numbers here, but that makes up about 50% of spending in the United States over the last couple years. So half of it just goes to what a lot of politicians and people call entitlements. So these healthcare systems and social security then for example, we have other things like national defense, which is 13%, but just after defense 13%, which the US spends a lot of money just after that interest on our debt, 11% of our budget every year in the United States goes to interest payments, which is just wild.
And so I just wanna sort of paint the picture of where we’re at. More than 10% of our budget every single year go to interest payments. We are now higher debt to GDP ratio than we were pushed World War ii. And again, in a minute we are going to talk about what this all means. But I kind of just want to take one brief moment here to just talk about why we’re in so much debt and how this has sort of gotten to where we are. So that’s a good question, right? Why are we in so much debt ? Well in the US we we tend to like two things. One is spending money and we also generally speaking compared to the rest of the world, like low taxes. And I am not gonna spend this episode getting into the merits of each of these ideas.
But I will just say I think we can all intuitively sort of understand that those two things are at odds, right? It is difficult to spend a lot of money as a government but not to collect a lot of revenue in the form of taxes. That’s going to put you in a deficit. We like spending money as a government, but we wanna keep our revenues which are taxes low, that leads to a deficit. We are basically as a country in a situation we are, we are spending more than we earn. It’s, it’s pretty plain and simple. Now, you know, I try not to get too much into politics on this show, but I do think it is worth mentioning because there is a lot of finger pointing and blaming around the national debt that happens politically in this country. I have dug into this, I’ve looked a lot at it.
And all of the data shows both parties do this. Like this is just something that going back for a very long time, both political parties are responsible roughly equally responsible for contributing to the national debt. Going all the way back to 1913, I actually looked at this. I looked and found some studies that show Republican administrations versus Democratic administration and how much they have contributed to the national debt per term. So per presidential term and Republicans come to 1.39 trillion, Democrats are just a little bit lower at 1.22 trillion. But you know from a historical sort of data perspective, it’s roughly equal, right? They’re very close to one another. Both parties are doing it. Now how they contribute to the debt is a little bit different. Republicans tend to contribute to the debt by lowering taxes. That’s lowering what the US government earns essentially. Meanwhile, democrats tend to contribute to the deficit by increasing spending.
But either way, regardless we get more debt, we as Americans have been saddled with more debt. Now of course over the long course of history there have been wildly different times of debt. Like I, I actually looked at which president contributed to the most debt. There’s one that just is so far in front of everyone else, but it makes sense. It’s Franklin d Roosevelt because he was the president during World War ii, he actually increased the deficit by about 800%. The only one who even comes close to that is Woodrow Wilson who is the president during World War I. Those two stand out in a totally different category of contributing to the debt than any other president. After that you actually get a lot of modern presidents, which I think is really interesting. It’s not really correlated to one party or the other, it’s just a lot of the most recent presidents have contributed the most to the debt.
So after that we have Reagan, George W. Bush, Obama, HW Bush Trump during his first term, Nixon Biden, Jimmy Carter, bill Clinton. So as you can see, this trend has basically accelerated recently where pretty much all presidents over the last couple of decades have contributed considerably to the debt way more than what we were doing in the 17, 18 hundreds, early 19 hundreds. And there’s a lot of reasons for that, right? The US is positioned in the global has totally changed. We have a totally different economy. But my point here is I just wanna show both parties do it and it has gotten worse recently regardless of what party is in power. So given this, given the fact that debt has existed in the United States for a long time and you know it’s been going up pretty rapidly, you know the last time we didn’t have an annual deficit was during in Bill Clinton in the late nineties. So it has been going up, our national debt has been going up consistently for 25 years. So why is this becoming an issue now? Like if we’ve had all this debt for 25 years, like haven’t we figured out how to deal with it? Why is this becoming more and more of an issue in today’s day and age? I’m gonna get into that but we do need to take a quick break. We’ll be right back.
Welcome back to today’s on the market episode. I’m Dave Meyer and I’m here talking about the national debt, how it’s come about, what it is. And now I wanna sort of like turn our attention to why this is becoming an issue right now. There are many reasons and there are probably people screaming at their computers or their phones right now saying it’s been an issue all 25 years. And, and I agree the debt debt is a serious issue that we all need to be talking about, but it is sort of like reentering the news right now. And that’s largely in part because of the, the government is doing its budgeting and Trump and the GOP are working on their one big beautiful bill act which has a lot of spending and tax implications, which of course will either positively or negatively impact the national debt.
And so we’re naturally talking about this right now first and foremost just because like this is what’s going on in the government and so what is decided in that bill is going to have consequences for the national debt. We’ll talk about that in just a little bit. But the other reason I think at least for me it is getting more serious is because interest rates have gone up a lot, right? Because as real estate investors we know that we are impacted this because mortgage rates have gone up a lot. But remember our national debt means that the US government is a borrower too and their interest rates are also going up. We had been in the United States in a period of very low borrowing costs for quite a while from about 2007 into 2023 or so. We had relatively low bond yields and they’re still not really high in you know, historical context but you know, the government was getting money 10 year loans for 2% or 3%.
Now it’s up to about 4.4% that is the yield on a 10 year US treasury right now. But that is up. And so the fact that we are borrowing money at the same pace but the interest rate that we’re paying on that borrowed money is going up means that more and more we are gonna be devoting more of our resources to servicing that debt and that means that that money can’t go elsewhere. Basically this just means that going forward if we keep, the amount of interest we pay is gonna continue to go up. And of course there are ways this could change, right? Interest rates could go down, bond yields could fall, revenues could go up. But as it stands today, like just if you look at what’s happening today and you’re not just sort of like forecasting what could happen in the future, if you look at where we stand today and the likely path, if nothing big changes, our interest payments are going to go up and it’s going to continuously be a more and more share of our annual budget, right?
Just think about this because we have 10 year notes, right, that were issued right now in 2015 at maybe a two point half percent. So if the government needs to rebar, they pay that money back, right? And they need to rebar money here in 2025, they’re gonna be paying considerably more for that refinance, right? As real estate investors, we can kind of understand this. That is what’s happening to the US government more and more and that’s why this is becoming a more pressing issue because those interest rates are going up and sort of forcing I think more serious conversation about the national debt. Now some people might be thinking wow, well maybe we just borrow more, right? Can we just borrow more money to to pay that interest? And that’s honestly what we’ve been doing. Sure you could do that, but it means that’s gonna be at a higher and higher rate.
And as we’re going to talk about, you can probably already see where this is going that that can sort of snowball, right? You’re borrowing money to pay more interest. That’s like kind of paying off one credit card with another credit card. Not sure that’s the best idea, you know that’s the TLDR here. But hopefully you can see that this, this might not be the best situation. So that’s where we are today. But I think it’s sort of important for us to all just take a minute and talk about how this situation could actually potentially get worse and maybe potentially compound because the situation we’re in today, I will say that it’s like relatively stable. I do not think it’s a good situation that we have this much debt, but it’s not like there’s this huge acute issue where the national debt is going to crater the US economy tomorrow.
I don’t think it’s likely to really have huge negative impacts in the next couple of weeks. It could in the months or years. I don’t know. There’s some dynamics that we’ll talk about in just a minute, but as of today, like right, this isn’t impacting you and me like in some huge acute way, but there is a potential that it could like this, this could get worse and it could potentially get worse rapidly. I’m not trying to scare people or fear monger, but I do think it’s sort of important for everyone to understand how different scenarios with the debt could play out. So lemme just share some thoughts with you. We, we’ve talked about this, but the rate the government pays to borrow money on their treasuries is partially set by the Fed, right? The, the federal funds rate, which the Fed controls is important to how much the government is paying to borrow money, but it is really up to investors.
The question here is like are you willing to lend the US government? And if so, what interest rate are you going to demand in order to give up that money to the US government for that period of time? Right now if you’re gonna lend to the government, the yield that you will get is about 4.4%. But that’s not fixed, right? It’s not like the Fed says it’s 4.4%. They can influence that in ways, but it actually just goes up and down in the free market based on supply and demand. It’s how much treasuries, how much debt is the US government trying to borrow and how much willingness is there in the investor community to actually make those loans to the US government? And this demand and supply, just like everything, it fluctuates on a million different things. It fluctuates based on the stock market, the federal funds rate, bond yields in other countries, the fear of recession, the fear of inflation, those are big things that impact these yields.
And guys, this is complicated stuff I do try and talk about on the show. ’cause although it is complicated, some people think it’s boring, it has huge impacts on particularly real estate but the entire economy. But that’s just what you need to know for this conversation about debt is these things fluctuate, right? But having more debt is actually one of the variables in what yields and interest rates are on that debt. Because having a lot of debt can actually push up the interest rates on debt even further, right? Debt can create more debt and there’s this risk of a snowball effect here is just how this could play out for the economy and for real estate investors, step one, basically the US government continues to fail to address the debt because both parties are doing this and neither of them sort of figures out a way to either increase taxes, decrease spending or some combination of both.
So that instead of running at a deficit every year we’re actually running at a surplus and chipping away at our debt. So just in the scenario I’m trying to spell out here, just imagine that status quo continues and neither party figures out how to address the debt and the debt continues to go up. This probably lowers demand for us treasuries. Less people are going to want to lend money to the US government in this scenario. And you might be thinking why if there’s more debt that means that there’s more opportunity for me to lend money to the government and to earn a return on that. Well, bond investors think a little bit differently than stock investors or real estate investors. They are really worried, generally speaking about two potential scenarios. Scenario one here is that the US government defaults on its debt, right? We as investors understand this, like that’s basically instead of you paying your mortgage and getting foreclosed on the US can technically default on its debt.
There’s a scenario that could play out where we as a country get so indebted that we eventually cannot pay the interest on our loans, we cannot pay back the bond holders and those bond lose all of their money or they lose some of their investments due to a debt restructuring. And I think you can imagine this, but this would just be catastrophic for the economy and this is why regardless of party in power making the debt ceiling a a topic of political debate or sort of like in the political gains manship is super dangerous, right? I, I do believe you probably can tell by the fact that this episode exists that I believe the large national US debt is dangerous. But I think flirting with defaulting on our debt is also really dangerous and probably something that should be outside the realm of political partisanship and gamesmanship.
That’s a, that’s a rant anyway. So that first scenario that I’m trying to describe here that bond holders are really concerned about is default on its debt. But that is not the only risk for debt holders. This second scenario that a lot of debt holders, and I think this is probably a more acute fear for most debt holders right now, is that with tons of debt, if debt keeps going up the other way that the US could deal with it instead of defaulting and saying, oh we can’t pay is just to print more money, right? The United States, the treasury controls how much monetary supply there is in this country. And if the US gets to a point where they’re like, hey, we have to make hard decisions about paying for Medicare or Medicaid or military spending and servicing our interest on our debt, they might just choose to print a bit more money and that might sound appealing and governments print money all the time.
But if you do that in any, you know, significant way that typically leads to inflation, that is a very well known relationship to increasing the monetary supply and inflation. Now bond investors particularly they hate inflation. They, it is one of the things that really scares bond investors because it devalues the interest they’re receiving, right? Printing money to pay bond investors back is kind of like giving the middle finger to bond investors ’cause it’s like, hey, you lent us money and we were promising to pay you back this interest rate. Yeah, we’re technically gonna pay you that amount, but the value of each of those dollars that we’re giving you is gonna be significantly less ’cause we increase the amount of monetary supply. And this is just another bad situation for investors. Just by the way, if you’re wondering which of those two scenarios is more likely, personally, I believe scenario T is much more likely.
Like if you were US government and you were faced with the prospect of defaulting on your debt or just printing more money, I think the politically expedient thing to do would be to print more money. And that’s why that is more likely. Now of course those two first and second scenarios are the two bad ones. There is of course a positive one that could possibly happen, which is some level of what I, I would call austerity, which is basically the government decides that this is a problem and either raises taxes to increase revenue cuts spending in some way or some combination of those two things to get the debt under control, start running a national surplus and chipping away at the debt. And this is ideally going to happen also at the same time where we have economic growth. Like if we had that at the same time we could increase our tax revenues without actually raising taxes and that would also help chip away at the deficit.
And this frankly is what I think everyone bond investors, normal Americans should all be sort of rooting for is that we can get the debt back under control. It doesn’t necessarily even have to get to down to zero, but this idea that it can can keep growing and growing and growing indefinitely, the math just doesn’t bear out. And so what I think the best case scenario is, you know, you don’t wanna cut back so much all at once typically ’cause that could lead us into a recession. But I think if we could start sort of chipping away that that would be a good step. Unfortunately we haven’t really seen steps in that direction just yet. I will talk about some of the things that we’ve seen Doge doing and what’s in this new tax bill and if that’s likely to add or help the deficit. But we do need to take one more quick break. We’ll be right back.
Welcome back to On the Market. I’m Dave Meyer talking about the national debt here today. Just before the break I was describing why debt could actually increase borrowing costs, which as real estate investors should be on your mind, right? And and I was explaining that there’s basically two negative scenarios that bond investors are worried about. The first being the potential for default, the second being for printing money. But I was also saying there is a positive possibility where we’d start to chip away at the debt. But what we’re seeing in the new tax bill, even after some cuts to federal spending is that basically everyone agrees that if this one big beautiful bill act passes, it will contribute to the debt in a way like it has over the last couple of years, but it’ll actually accelerate the debt by two to $3 trillion over the next 10 years.
And this is true regardless. You know, I, I make a point of looking at forecast and estimates across the political spectrum from people who tend to lean left, left, center, right center, all the way on the right. Like I look at all these and pretty much everyone believes that the debt is going to continue to climb from this bill. Like I, I haven’t seen any credible studies that show that this spending bill that’s working its way through Congress right now, and again it hasn’t passed, it’s still working its way through Congress is going to contribute to more debt. So all that’s to say, right? I was talking about these three scenarios and why sort of this is becoming more of an issue. I think just generally speaking, bond investors are worried about scenario one and two and they’re becoming more likely the risk of default.
I think that’s less likely. I think more people are worried about this idea that the US might start printing money to service it. Its debt that makes the value of holding these bonds a lot less. And when they’re just, the value of the bonds is less, that means there’s less demand and that pushes interest rates up. So I know I sort of like went on this long story here, but I think it’s really important to understand that what’s going on here is that bond investors are seeing the US have more and more debt. It’s climbing every single year, and they’re worried that maybe there’s gonna be inflation and that they need to get a higher interest rate in order to lend the US government to cover that risk of inflation. This is something called a risk premium. It’s basically how much the investors are going to demand from the government in order to compensate them for risks they see.
And if investors feel that there is risk of inflation, serious inflation, if there’s risk of default, that risk premium is going to go up. And maybe you’re seeing right now how this situation has the potential to spiral. And I’m not saying this is going to happen, it is not happening yet. I just want to explain how this could spiral and why there are so many prominent economists and people who are afraid of debt, right? Investors right now, if just imagine this, they get a little bit more worried about whatever it is, right? They have, they’re worried about inflation or or risk in the economy generally. So yields go up, right? Their risk premium goes up, they demand a little bit more. That’s seems okay, but it does mean that we’re paying more interest on our debt every single year, right? Then that worries investors even more because they’re saying, I don’t want to issue more debt to the us.
They’re gonna have a hard time servicing their existing debt. So we need a higher interest rate to lend in 2026 or in 2027 or whatever it is, right? So this is basically what happens, right? There is risk that leads to higher interest rate, which leads to more risk, which leads to higher interest rate. And it’s kind of this spiral that can happen that again, it’s not happening in the us but this has happened in history to other countries and other governments. And it’s why I believe that the debt is a problem that needs tackling. And since there really aren’t right now any credible solutions on the table, I think it’s a real concern. And I’m, I’m guessing out there, there are some of you who invest in a lot of gold or cryptocurrency to hedge against the risk of dollar debasement or don’t have a lot of confidence in fiat currencies.
You’re probably all nodding your head right now and agreeing that there are real concerns about this. But the other side of this is that everything is very uncertain right now and it’s hard to estimate what the risks are. But I do think it is something that as real estate investors, we really should be thinking about because as we talk about on the show almost every week, right? Mortgage rates are almost directly tied to the yield on US treasuries. And so if some of these scenarios do wind up playing out and investors start to lose confidence in US treasuries as a safe haven, then borrowing costs may go up across the entire economy. And that is true, even if the Fed lowers rates, right? We saw the Fed lower rates back in September and bond yields went up right, and mortgage rates went up. They are not perfectly correlated.
They are related to one another, but they don’t always move in lockstep. And so while everyone in real estate seems to be believing that yields are going to go down and mortgage rates are gonna get cheaper, and that is still, I think a relatively likely scenario, we do need to keep an eye on this because if the national debt continues to balloon and grow, I feel very strongly that what I’m talking about is gonna get increasingly likely, right? We might not see the declines in yields and in mortgage rates that everyone is hoping and waiting for if the debt gets outta control. Now, like I said, I don’t think this is a problem for today. It might not be a problem next week, but it could be in a couple months. It could be in a couple of years, and it’s something I think everyone needs to have on their radar. Again, I’m not trying to spark unnecessary fear, but I do think this is a legitimate economic concern that people should be thinking about. So that’s it, that’s what we got for you today. Thank you all so much for listening to this episode of On the Market. I’m Dave Meyer, I’ll see you next time.