FREE NEWSLETTER
FROM THE COLOSSEUM in Rome to the palace at Versailles, look around Europe and you’ll find artifacts of once-great empires. What happened to them?
Each faced its own challenges, but there was also a common theme: They had poor financial management and became overburdened by debt. That’s why a recent analysis in The Wall Street Journal—titled “Will Debt Sink the American Empire?”—is worth our attention.
In 2024, the federal government’s budget deficit will come in at $1.9 trillion. That will be added to an existing debt load of nearly $35 trillion. To put that in perspective, the debt is now closing in on 100% of gross domestic product (GDP), up from just 70% in 2012. If the current trajectory continues, by 2028, our debt will exceed the prior all-time high of 106% of GDP, a record set in 1946 as a result of World War II.
Given these figures, why is there no political will in Washington to right the ship? As the Journal points out, deficits are—ironically—one of the only topics that unites the political parties. That’s because the two main levers to reduce deficits are to either raise taxes or to cut spending. Neither is appealing to politicians.
In part, the issue is also structural. So much of the budget is non-discretionary. This year, 47% of spending will be allocated to Social Security and Medicare benefits, 14% will be spent on defense and 13% on interest payments. In other words, even if there were more political will, there isn’t a lot of room for maneuver.
There’s a school of thought that views debt as a non-issue, arguing that the U.S. government can simply “print money.” While that’s technically true, another economic concept also applies: When governments go too far in printing money, a side-effect can be inflation. We saw that during COVID-19. When the government ramped up spending in 2020 and 2021, the result was 2022’s 40-year high for inflation.
This idea—that printing money leads to inflation—is not new. In the last years of the Roman empire, when the government began spending far beyond its means, the imperial treasury began to “print money” in what it thought was a subtle manner. It reduced the silver content in each of its coins—from 100% all the way down to just 0.5%. This led to inflation, and even hyperinflation in some years. In the year 210, inflation compelled the government to raise soldiers’ wages by 50%.
From there, things unraveled. Without any further ability to dilute the currency, Roman officials turned to burdensome tax increases in an effort to keep up with spending, but that only led to civil unrest. Ultimately, the empire fell when, as a result of financial weakness, it was no longer able to defend its borders. According to the Journal’s analysis, other empires, including those in France and in Spain, followed similar paths.
In economic terms, what happened to these ancient empires is known as “crowding out.” As interest payments consume a greater portion of a government’s budget, the result is that less and less is available to spend on everything else. What’s concerning is that the Congressional Budget Office sees this phenomenon beginning to occur in the U.S. According to a recent report, “The current law debt trajectory will reduce income growth by 12 percent over the next three decades.”
Does this mean we’re destined to go down the same path as Europe’s faded empires? Definitely not. Relative to where those empires’ finances were in their final years, our situation is still very manageable. That said, I think our debt situation warrants more attention than it currently receives. As I noted a few weeks back, a concept known as “rational ignorance” means that the media sometimes fails to focus on the stories that are most important. But this lack of attention doesn’t mean they aren’t important.
As an individual investor, what steps can you take? I believe that the greatest risk, ironically, is to the investment that’s typically viewed as the safest: U.S. Treasury bonds. With the debt load growing, Congress has found itself deadlocked over budget issues with increasing frequency, resulting in a number of government shutdowns.
So far, thankfully, it hasn’t gotten to the point where the Treasury has missed a payment to bondholders. But we’ve gotten close, to the point where it’s required the Treasury to employ “extraordinary measures” to avoid a default. The next time, we may not be as lucky. In an extended shutdown, the Treasury could run out of options and might be forced to default. For that reason, I suggest looking for ways to diversify your bond exposure. Below are three suggestions.
First, I recommend holding a significant portion of your bond portfolio in short-term Treasury holdings. Because a default wouldn’t happen overnight, short-term bonds might allow an investor to move funds out of the way before the situation deteriorated.
Second, another way to diversify would be to hold municipal bonds. Because state and local governments can’t print money the way the federal government can, municipal bonds carry more risk than Treasurys. Still, municipals might prove less risky if Congress were deadlocked over the federal debt ceiling, but municipal governments continued to pay their bills.
What’s the third way you might diversify a bond portfolio? Interest rates today are at levels we haven’t seen in more than 15 years. Most expect rates to drop—likely this year—but that’s not guaranteed. There’s a school of thought that interest rates may remain elevated, or even rise, if concern grows about the government’s debt load. To guard against rising rates, you might hold some portion of your bond portfolio as individual Treasury bonds, which you could hold to maturity.
What other steps could you take? Because Social Security benefits account for such a large portion of federal outlays—and because the fund on which the system relies is expected to be depleted in a decade or so—it’s not unreasonable to expect that Congress might trim benefits for future retirees.
The last time Congress made changes, in 1983, the cuts amounted to a 13% reduction. To address the current situation, benefits might be trimmed as much as 20% or 25%. But to make the cuts politically palatable, Congress would most likely avoid affecting those close to retirement age today, and it certainly wouldn’t reduce the benefits of those already in retirement. If you’re earlier in your career, though, and building a financial plan, it wouldn’t be unreasonable to assume a smaller benefit than your Social Security statement currently shows.
I don’t mean to be an alarmist. Indeed, in the mid-1990s, after years of rising deficits, the federal government actually ran a surplus for a period. Things can change. The current trajectory isn’t a one-way street, and debt wasn’t the only reason those ancient empires fell. But make no mistake: This is a topic that’s worth investors’ attention.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Yet certain politicians cut taxes on corporations and the 1%, resulting in huge budget shortfalls. Most individuals pay their fair share of taxes, yet these get to skate by. Why? It buys votes.
Gotta love how people want “others” to pay their “fair share” when it’s not their own pocketbook being impacted. Unfortunately, “all” our pocketbooks are being impacted by unrealistic out-of-control governmental spending regardless of perceived financial station in the form of out-of-control inflation. Today’s culture of instant gratification is truly a form of vote buying resulting in our government to live beyond our means. Those of us who demonstrate a life of frugality and live within our means will help us be okay when this house of cards is disassembled.
W2 folks pay more than their “fair”share. Lots and lots of others, and I know a few, cheat and pay almost nothing. Is that “fair”? That’s why IRS wants to make cash transferring apps report amounts over $600 and hire new agents.
Serious question; if we believe SS will be reduced in +/-10 years, should we take that into consideration in taking SS sooner than later? How can we be sure congress won’t reduce older folks close or at retirement age?
I have recently read the 2005 book, The Coming Generational Storm, by Laurence J. Kotlikoff and Scott Burns where they write about many of the same topics. Almost 20 years later it is very worrisome, but not surprising, to me that their expectations and yours regarding our national debt have not been addressed.
In the book they also discuss “the many precise and quite painful steps we need to take, both as a nation and as individuals, to preserve and protect the American dream“.
Our children and grand children will pay our generation’s bill if we fail to take action.
It does seem that if the Treasury really defaulted many other investments would drop precipitously. US (and other national debt) is a huge issue and bonds seem to be an unlikely place to keep value.
Thank you for highlighting this possibility.
Corporate and international bonds would seem to be options for diversifying (aside from the fact that they would take collateral damage from the chaos caused by US default)?
Thanks for writing this. This topic gets far too little attention. I have yet to hear a convincing argument for how the U.S. gov’t gets out of this conundrum. While it is/was true that mathematically there are/were ways to actually reduce the debt (like the Simpson-Bowles plan of 12 years ago), there is simply no political will or way it would happen. There’s just too much interest in keeping the spending going, and also not raising taxes.
I don’t see any other way than: continuing to finance the budget with more debt, that leads to inflation, which leads to the need for more debt due to higher interest rates imposed by the creditors (think us), then hyper-inflation, then at some point the creditors have had enough. At that point, we say goodbye to the current dollar and institute the New U.S. Dollar (NUSD) and start over. Many other counties have done it (some multiple times). It sucks, it’s terrible, but I cannot envision any alternative to that outcome.
Adam’s suggestions are good ones, however. Limit exposure to treasuries (at some point, not necessarily right now). Limit or eliminate reliance on S.S. As of now my wife and I (mid-forties) do not count S.S. as part of our retirement plan. If it’s there it’s gravy on the biscuit.
Adam good article among your many good ones.
I was curious if you can cite where these came from … are these CBO#’s ?
47% of spending will be allocated to Social Security and Medicare benefits, 14% will be spent on defense and 13% on interest payments.
Thanks for another informative, thought provoking and comment provoking article, Adam. I always learn something from your articles and often save and/or forward them.
According to NBER, the richest 5% of Americans own 2/3rds of wealth in the United States. We as a society have choices to make:
1) We can deny healthcare and a dignified retirement to our senior citizens, we can spend less on protecting our assets and interests with a strong military, and reduce investments in healthcare and education for our newest fellow citizens.
2) We can marginally increase taxes on the top 5% of Americans and afford to keep pace with other Western democracies and ensure a comfortable life for our seniors and invest in our children.
We can achieve a balance through messy compromise and passionate dialogue. It all comes down to who we send as our representatives to local cities, state houses, and Congress. There, our track record hasn’t been anything our grandkids will be proud of.
Apologies if this came off as political speech.
Agree. Let the fabulously wealthy individuals and corporations pay their fair share
Informative as always, Adam. Thank you.
History tells us that no empire lasts forever — the Byzantines, Ottomans, Romans all fell over the centuries, due to overreach and the financial issues you describe — but I’m not sure I would put the United States in that category. Those empires built wealth by reaping it from the nations they conquered and held. The US economy is based not on conquest and confiscation but on creation of value and trade. And we have no realistic concerns about invading armies attacking our borders. Manitoba is not going to invade North Dakota.
That said, we are in unknown territory given the massive scope of our debt and our unwillingness to address it with revenue generation, added to the complexities of the interconnected world economy. There’s no historical precedent for a situation like this, and I firmly believe that for all the “expert” writings on the subject, nobody really knows what to do about it.
“Those empires built wealth by reaping it from the nations they conquered and held. The US economy is based not on conquest and confiscation”
You are living in a dream world. The U.S. has confiscated cash, gold, oil and more from its “enemies”. Ask Iraq, Syria, Russia, Iran, etc, etc, etc.
Spot on. It’s kind of like watching a movie where there is an incident or travesty and someone yells out, “Somebody do something!” Well hey, we’re all “somebody”. It’s difficult to imagine what can be done other than voting for whom you hope might try to start to plan and implement rather than kicking the proverbial can down the road. Again.
I suppose that if I suggest actually paying the piper by raising taxes on the wealthy and on corporations I will be accused of being a socialist, even though I would have voted for the Lib Dems in the recent UK election if my postal vote had arrived in time.
I presume that you feel that the U.S. has a revenue problem which can only be addressed by raising taxes on either the well-to-do or corporations or both.
First, I submit that we don’t have a revenue problem—we have a spending problem. Unless we as a country get control of government spending, just raising taxes will not solve our fiscal difficulties, only postpone another day of reckoning.
Second, based on government forecasts, those earning $1 million dollars or more in 2024 will pay an average of about $776,800 in federal income taxes. That’s about 475 times as much as the average American taking home between $50,000 and $100,000. Politicians always claim that the rich don’t pay their fair share, but never tell us exactly what that fair share is. In 2021, the top 10% of taxpayers paid 75.8% of all federal income tax collected. If that’s not a fair share, I’m stumped as to what a fair share should be.
Third, corporations don’t pay taxes. Any tax increase levied on corporations will ultimately be paid by consumers facing higher prices, fewer jobs, employees receiving reduced benefits, lower dividend payouts, and shareholders getting lower returns.
Fourth, I think it’s telling that we often call for a tax increase on the wealthy or on corporations, but never a tax increase on ourselves. Given the fiscal mess we’re in, shouldn’t all citizens pony up to right the ship?
The U.S. federal income tax code is already among the most progressive in the world. Most EU countries that raise a higher share of income than this country, do so with a VAT.
Always appreciate your comments, Kathy. 😊
Well MyTime, this is what I’ve seen. Rich people who happen to be paid via a W2 pay plenty of income tax. I had a client who’s W2 was a million bucks, the only reason he could itemize was because of charitable donations.
It’s often a different story for self-employed who get to deduct all kinds of things employees can’t, and get up to a 20% of net income deduction on top of that. Further, self-employed can easily understate income and or overstate expense.
So no, I wouldn’t call you a socialist. IMO everyone expects tons from the federal government, but only some are willing to pay for it.
I’m certain that our leaders will compromise to find a solution to the debt by years end….. Said no one ever!
Thanks, Adam, for yet another useful, thoughtful column. It seems like just yesterday when the national debt had shrunk, we spoke of a peace dividend, and federal budgets were balanced…
The start of my work life coincided with political discussions about the solvency of SS and the changes to SS that ensued. Consequently, in my early earning years, I did not take SS as a given or that it would eventually provide for me. In retrospect, my alarmism was a good thing. It spurred me to save for and achieve a retirement independent of SS that I now enjoy.
Adam, the debt to GDP ratio is now 122%
The government’s debt can be measured two different ways: gross debt and net debt. I used net debt, which excludes debt owed to another branch of the government. Gross debt is indeed at 120%+. By either measure, debt is near all-time highs, but thank you for the question.
To see the detailed numbers by year: https://www.cbo.gov/publication/59946#_idTextAnchor019
this link also explains how each debt measure is calculated.
For someone who doesn’t mean to be an alarmist, you certainly know how to deliver alarming news.
Thinking of history, those large empires you mentioned, and others, had such a large amount of stored wealth that it took a while for them to wind down, and measures such as debasement of currency were gradual. In contrast to a sudden event, gradual decay may make folks complacent,and slow to act to remedy measures. I can see that happening with us. When we live with danger long enough without suffering harm, we can grow inured to the possibility.
There’s never truly a safe haven in money, or in life, is there?
Perhaps the proverbial “cash stuffed in the mattress” ? (I’m kidding, I think)
Joe, when inflation in the U.S. began to rise in 2022 I got afraid of the diminishing value of the dollar. I called a friend in Argentina to ask about how they managed inflation. She told me that she takes her salary and buys U.S. dollars and keeps them in her mattress. I didn’t have the heart to tell her that the reason for my call was my fear dollars wouldn’t be worth much.
For the short term and muni options would bond funds work?
Yes. But make sure your tax bracket warrants getting into munis.
You’ve tapped into three of the biggest questions in our retirement plans: tax rates after 2025, inflation rates, and Social Security benefits. A real Federal default would be disastrous with lasting consequences for all three. It is an avoidable catastrophe with more good options the sooner Congress acts. These variables — and more — are good reasons to build into plans a healthy margin for surprises.
I am skeptical about diversifying into munis to reduce risk because a big portion of state and local budgets is filled with funds from federal grants, 17% on average according to one source.
Two “fun” reads related to this topic: