US government debt rises to historic highs – Part 1: What does this have to do with black holes and what are the investment policy consequences?


Unfortunately, there is nothing encouraging to report regarding the development of US government debt. It is at its highest level since 1944. In the first part of this series of articles, we outline the development of US government debt over time and compare the current situation of the US budget with the past.


US government debt is rising to an all-time high…

… and that in peacetime!


What is “remarkable”?

Look at the graphic below. Do you notice anything humorous? Why is the graphic frightening and “amusing” at the same time?


Chart 1: US government debt held by private individuals as % of GDP

US government debt held by private individuals as % of
Source: Congressional Budget Office of the US Congress


Budget deficits of 5% of GDP threaten in the future

The size of the US debt economy is becoming increasingly worrying. Budget deficits in the range of over $1 trillion and over 5% of gross domestic product (GDP) are likely to be the norm rather than the exception in the coming years.


2020 will be a record deficit year and could even overshadow 1944/1945

The Congressional Budget Office estimates that the federal deficit will amount to about USD 3.3 trillion in 2020, which would correspond to about 16% of GDP. This would be the largest deficit in percent of GDP since 1945.


Pandemic is the last straw

The increase in debt is driven by the Trump administration’s tax reforms and the economic slump caused by the COVID-19 pandemic. Even without the pandemic, the increase in debt would have been gigantic.


Professional and functional optimism of politicians against better knowledge

In fact, the projections of the Congressional Budget Office may turn out to be too optimistic. Now is the time to analyse the “funny” part of the graph.


Subversive colour choice

The creator of the graphic deliberately used the colour pink. There are probably subversive, rebellious employees within the Congressional Budget Office of the US Congress who make fun of the fact that their own projections (or those of their colleagues?) were made with rose-coloured glasses and regularly prove to be too optimistic. It should be noted that only the US national debt is forecast here, excluding the debts of local authorities (US states, cities, municipalities and special budgets that have been outsourced). All off-balance sheet liabilities are also missing. These are enormously high, as they include, for example, the pension promises of state employees, who are hopelessly underfunded. Please also note that Chart 1 contains only the US government debt held by private individuals. The share of US government debt held by the FED is missing.

More appropriate colours for such a graph would therefore have been “depressive black”, “fire-brigade warning red” or even better “black-hole black”, as US government debt is already beyond the event horizon. What this means and at what interest rate the national debt might be sustainable in the medium term after all, you will find out in the second part of this series of articles. We will develop a “sustainability formula” for the national budget and examine at what interest rate financing could be secured in the medium term. Part 3 will deal with investment conclusions.



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Thomas Härter
Chief Investment Officer Aquila