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When to Borrow? When to Pay Off? |
US Government Debt: Treasury Bills, notes and bonds are fixed income, considered safe investments with relatively low interest rates.
The current National Debt of $15.5 trillion equates to a debt-to-GDP ratio around 81 percent based on the most recent second quarter GDP of $19,2 trillion. According to the World Bank the tipping point is 77 percent (the point at which debt begins to have an adverse effect on economic growth) – we have blown past and are headed higher.
When to Borrow: borrowing can be an effective tool for boosting the economy. This makes sense when the economy needs stimulation, unemployment is high, a recession is looming etc.
When to Pay Off: unemployment is low and the economy is humming along is a good time to reduce debt so that there is room to maneuver when the next economic downturn occurs.
Current Status: GDP growth is approaching the mythical 3%, interest rates are low and the economy is “booming” in the commander’s words. The Tax Cuts and Jobs Act significantly reduces revenue and increases spending which portends punitive taxes, stagnant growth and frozen employee incomes.
By 2028 the Government Debt could reach $33 trillion (20% more than would occur without the Tax Cuts and Jobs Act). This would cripple the government’s capacity to support the economy and would squeeze private borrowers. According to Harvard Economist Kenneth Rogoff: “If the U.S. slips into recession, we’ll lack the option of lowering taxes or increasing spending on infrastructure, for example, as tools to revive growth.”
The longer this situation is ignored, the more challenging it becomes to fix.