The conversation around U.S. national debt usually starts with a large, attention-grabbing number, trillions of dollars, record highs, and warnings about unsustainable paths. But focusing on the size of the debt alone misses the more important question: what direction is it moving relative to the economy? In other words, the issue isn’t the debt itself. It’s the trend, specifically the trend in the debt-to-GDP ratio.
Economists and markets tend to rely on a straightforward measure: the debt-to-GDP ratio, which compares what the country owes to what it produces. This is where the real signal is found. If debt grows faster than GDP, the burden increases. If GDP grows faster than debt, the burden shrinks over time. That’s it. No complex modeling or dramatic assumptions, just math. And it’s an important distinction because a growing economy can support a larger absolute level of debt without increasing risk.
Discussions about the U.S. national debt often focus on the headline number alone. A $38 trillion debt sounds alarming in isolation, but without context, it tells us very little. It’s similar to personal finance. A $500,000 mortgage means something very different for someone earning $75,000 versus someone earning $500,000. The number itself hasn’t changed, but the capacity to support it has. The same logic applies at the national level. As the economy grows, income, through tax revenue, grows alongside it, creating a larger base to service existing obligations. This is why markets don’t react to debt levels in a vacuum. They react to growth, productivity, and the sustainability of the trend.
Historically, the U.S. has managed periods of elevated debt not by aggressively paying it down, but by outgrowing it. Following World War II, the debt-to-GDP ratio was higher than it is today, yet the resolution didn’t come from austerity or drastic policy shifts. It came from economic expansion, productivity gains, and moderate inflation. Over time, GDP grew faster than the debt, and the burden declined naturally. While economic growth will certainly play an important role this time around, the size of today’s fiscal challenges suggests that some combination of tax increases, spending restraint, and other policy adjustments may also be required to place the debt on a more sustainable path.
The real risk, then, isn’t simply that debt is high, it’s the direction of travel. If deficits remain large and debt continues to grow faster than the economy, the debt burden gradually becomes more difficult to manage. That remains one of our concerns today. Rather than shrinking relative to the economy, the nation’s debt burden has continued to grow.
In the end, the size of the U.S. national debt by itself is not the issue. The trajectory is. While the debt burden has continued to rise, our view is that financial markets ultimately act as a constraint on policymakers. If deficits remain too large for too long, investors will likely demand higher interest rates to compensate for the increased borrowing, raising the government’s financing costs. At some point, those higher costs can force difficult fiscal decisions that may have otherwise been postponed. For investors, that means paying less attention to the headline debt figure and more attention to the signals coming from the bond market, economic growth, and the overall fiscal trajectory.
Top Row L to R: Brad Engle, Mike Sullivan, Sebrina Ivey, Christian Lewton, Jason Kitner
Bottom Row L to R: Carin Wagner, Angela Kennedy Lee, Jenny Merges, Brian Friedman, Deirdre Mcguire, Barbara Terrazas, Reed McCoy