America’s love affair with debt just got more dangerous

When the first reading of 2023’s fourth-quarter gross domestic product came out last week, it surprised some analysts as more robust than expected, growing 3.3% on an annualized basis. How could the economy be growing when people still feel like they are struggling? How are things considered “good” and “expansionary” when big companies from Microsoft to Salesforce to Levi Strauss are announcing layoffs?

The reality is that current “growth” has a costly side — something that could be seen as the equivalent of window dressing. That cost is seen both in the excessive aggregate debt load and the outrageous cost to service the debt that has been required to increase growth marginally in the United States.

In today’s economy, massive deficits are being used to create the appearance of growth.

Whether it’s jobs numbers or GDP, a substantial portion of what appears to be growth is coming from the government, which means it is coming at the direct expense of taxpayers. Government spending has been robust, but also costly. The adjusted-for-accounting “real” deficit for the last fiscal year was around $2 trillion. Again, this is not overall government spending; this is just the deficit — the amount spent more than taxes and other revenue that is ultimately financed through additional debt.

This level of deficit spending is around double (maybe a bit more) the historical average amount of U.S. government deficit spending as a percentage of GDP. It is also incredibly unusual for such large deficits to happen alongside economic expansions.

Normally, economic expansions lead to more government tax revenue, which shrinks the deficit. In today’s economy, the opposite is happening — massive deficits are being used to create the appearance of growth. And with financing costs being quite expensive today, particularly vis-a-vis the last fifteen years, that perceived growth is coming with a big price tag.

My friend and financial commentator Jim Iuorio shared a chart of the national debt on X (formerly Twitter), like the one below, and scrawled over it, “Tell me how good the economy is?” The truth is that if the U.S. dollar were not the world’s reserve currency, we would be in a severe currency crisis today. Economic “growth” is really an economic artifice.

We know that entities from the International Monetary Fund to the U.S. Treasury itself have noted that our debt and overall spending trajectory are unsustainable. The U.S. debt has even received multiple downgrades over the past couple of years. Yet the government is still willing to incur more debt and keep spending high so that Joe Biden can run with the “look how good the economy is” slogan.

Artificially stimulating growth through massive government spending, and the costs associated with it, saps future growth potential as well. With the increasing costs to finance the ever-growing debt load, government must divert billions upon billions of dollars simply to finance the debt, rather than put those dollars to productive use in the economy.

The bad example and habits of the government have spilled over to consumers as well. Direct stimulus, first under Donald Trump and then increased during the recovery by Joe Biden through the poorly named American Rescue Plan, not only boosted inflation but also allowed consumers to keep their personal balance sheets in check. As the stimulus ran out and inflation ran rampant, consumers — the ones who had jobs, anyway, given the low labor participation rate — did their best to keep spending.

Now, the personal saving rate for December has dipped to 3.7% (remaining below historic averages), and household debt has remained at record highs. Yes, consumers are still spending, but again, it is coming at great expense to them.

We need to be honest and understand that this debt-fueled economy is not healthy. In addition to curbing government spending, our best and most healthy path forward — the one that would really save our fiscal situation — is to reduce barriers to organic growth and unleash productivity. Unfortunately, that is unlikely to happen as long as the Democrats control the White House.