Daily Spotlight: Debt is a High Level of GDP

Summary

With the U.S. presidential election now concluded, and a Republican-led Congress, market participants are starting to consider the potential impact of new fiscal policies on the federal debt. While President-elect Trump argues that new tariffs will raise revenue for the government, others are concerned that tax cuts will have the opposite impact and increase borrowing. In recent weeks, the yield on the benchmark Treasury 10-year bond has jumped from 3.6% to 4.4%, in part due to fiscal policy fears. There is no doubt that U.S. debt levels have quietly and quickly grown over the past 10 years, and total U.S. debt is now more than 120% of GDP, according to the Office of Management & Budget. That is the highest level since World War II. In the 1970s and 1980s, the debt/GDP ratio consistently was in the 30%-40% range, and moved up toward 60% by 2000. The level soared around 2010, as the government spent aggressively to halt the Great Recession and rekindle growth (according to Keynes, that’s what the government is supposed to do). However, despite more than 10 years of economic growth prior to the pandemic, debt had only increased as a percentage of GDP. And now, reflecting the fiscal spending allocated to fight the impact of COVID-19, debt levels have surged further. This is not a problem that has to be fixed today. After all, interest rate