Does The United States Have A Debt Problem That Needs Fixing?

Wednesday, 13 May 2026, 4:15 pm
Opinion: Keith Rankin

On 7 May, Al Jazeera ran this alarmist programme about the 'national debt' of the United States: US borrowing exceeds GDP: What does it mean for the economy? (And here on YouTube.)

A topic surrounded by so much confusion. (Sigh!) The first problem is that what is commonly called the 'national debt' is actually the 'government debt'. Second, we have the issue of which debt measure to use. By one measure the United States government debt has become equal to the United States gross domestic product (GDP). By another measure, that milestone or millstone was achieved long ago, and is now 123% of GDP. The Al Jazeera programme uses both measures interchangeably.

The programme host – Cryil Vanier, who I usually respect as one of the best news anchors in the world's television media – commenced his contribution with an easily verified untruth; that is, untrue if using the usual measure of debt as a percent of GDP. He said: "The United States is the most indebted country in the world. Almost every year the United States Government has chosen to spend more than it collects. … The national debt now stands at $39 trillion dollars, exceeding the United States economy … for the first time since World War Two."

($39 trillion dollars is 123% of the United States' GDP! That 123% of GDP measure is exceeded by Venezuela, Japan [237%], Sudan, Singapore, Eritrea, Bahrain, Greece [146%], Lebanon and Italy [137%]. Government debt is not an indicator of a government's economic performance, let alone a cause of poor 'performance'; noting that the concept 'performance' itself is about optics – about theatre – rather than substance.)

Debt is owed by debtors, and owned by creditors. The Al Jazeera programme noted that 'Japan' is one of the big three foreign owners of the United States [government] debt. But note, above, that Japan is – among first-world countries – listed as the (proportionately) biggest 'ower' of debt. Indeed, Japan sees neither its large ownership of debt nor its large owership of debt as being a major problem; the Japanese economy is a sea of tranquillity compared to many other countries' economies.

There is a problem though; the one trillion dollar interest bill. That's unnecessarily large; indeed, that's a much bigger problem for the United States' government than for Japan's government, due to very different monetary policies in the two countries.

The key question to ask about the interest is: 'Where does the money go?'. It goes from the owers to the owners, of course; but who are the debt-owners who receive most of that interest, and to what extent do they represent the real problem (assuming there is a real problem)? For the most part, the interest-recipient owners – not exactly clamouring for repayment – are more than happy to return the interest to the owers, just so long as it is accounted for as additional debt.

The Al Jazeera programme, using one of the more egregious chart graphics that I've seen, shows that "debt has ballooned since the eighties". Correct, though the chart (commencing around 1800) – not using the correct (logarithmic scale) fails to show earlier balloonings. The chart shows a tenfold increase in the dollar-debt – not the percent of GDP – from 1976 to 1996, and a just a 6½-fold increase from 2002 to 2026; yet the latter smaller jump looks dramatic. At the end of the chart-viewing, we are told that there's "no plan to actively pay it back".

Putting aside the one-third foreign ownership of the United States government debt, we can think of the remaining two-thirds – the domestically-held debt – as being owned by the 'US banking system' (the banks being a short-cut for what is a rather complex financial system). So, the United States domestic government debt – a liability of the Government – is an asset of the United States' banking system. As is normal for asset-holders, the banks would rather retain and expand their assets; they would rather not liquidate their assets.

On the other side of the banking systems' ledger lies the liabilities of the United States' banks. These are the deposits of American households and businesses. The domestic debt is owned by Americans and owed by the American Government. Bank deposits are assets to depositors, and liabilities (ie debt) to banks. Banks hardly see this debt as 'bad' in any sense.

People would rather lend their governments than pay taxes, though most citizens realise that a substantial part of government spending should be funded by taxes rather than debt. A mix of taxes and debt works; it always has. Households and businesses prefer to own some government debt than to fund their governments entirely from taxes. It's not a problem. Debt's a solution.

The people own the debt that the government owes (albeit through the intermediation of the baking system). The people do not want the government to repay that debt. They just want the government to pay the interest. The people – the creditors, the debt owners – like it just as it is. The government debt is not a problem for them; rather it's an income for them, and insurance for them.

What would 'paying it back mean'?

So, if the government repaid its debt to the banks, the banks would either have to force the people to accept back their deposits, or would have to find other borrowers. In the latter case, some parts of the private sector would have to become substitute debtors, thereby adding much to the financial risk of the citizenry. In the former case, the people would have to accept banknotes – paper money – from the drastically shrinking banks; banknotes that could stand to become worthless.

In other words, if governments tried to pay back their debt, there would be a financial collapse on a scale which would make the global financial crisis seem like a non-event. (There was such a collapse in Romania in the 1980s.)

Looking at it from the point of view of the people, the banks' creditors – especially consider the Mum and Dad savers. They, and ordinary people like them, are the government's creditors. The government's debt is an important part of their savings; indeed, of their retirement savings. Who would like their bank coming to them, saying that the bank's main debtor (the government, as the banks' biggest debtor) wants to 'repay the debt'? So, they would have to take back their deposits; they would have to withdraw their funds; say, half their savings. And, at the same time, each other bank would be saying the same thing to its customers.

There is no clamour from the owners of the United States government debt to have that debt repaid. If anything, there is a clamour from would-be owners of United States government debt for the Government to take on more debt; not less. (In Japan, owning government debt is understood as 'financial security'.)

Global Financial Balances

We can understand the world's financial balance sheet, showing the net financial relationship between the two big sectors; the private sector (households and businesses), and the public sector (central and local governments).

Throughout the history of the world, the private sector has been the net creditor, and the public sector the net debtor. A financial balance sheet must add to zero; the net debt owed must be exactly equal to the net debt owned. It is not conceivable that the global balance sheet would have the worlds' governments – taken together – owning the world's debt, with the global private sector owing it; except possibly under a global soviet-style communist state, where we could imagine most people being in debt to the government.

The global balance sheet has two (net) components. The first component is financial stocks: assets (owning) set against liabilities (owing); these liabilities represent the global public debt. The second component is about financial flows: surpluses (credits) set against deficits (debits). Both components are, by definition, zero-sum games. Total assets minus total liabilities must equal zero. Total surpluses plus total deficits also must equal zero.

For the world as a whole, the public sector (the fisc) runs the deficits, and the private sector runs the surpluses. It is almost inconceivable that, in any year, there could be a global fiscal surplus, meaning a global private deficit. (In most years there are some countries' governments which run fiscal surpluses.) This state of affairs is driven by the fundamental drive of private citizens to save parts of their income; if successful on balance, by definition a private sector surplus means a public sector deficit. Basic human nature dictates that there will be a global fiscal deficit, every year.

Public Debt management, in practice

The size of the global public debt, measured (appropriately) as a percent of the size of the global economy, goes up and down over time. This is because there are a numerator (the global fiscal deficit) and a denominator (nominal gross world product, the measure of the size of the world economy, the sum of all countries' GDPs).

We note that the denominator is a nominal measure, meaning that we are referring to the monetary measure of the size of the world economy, not the production measure. Nominal GWP (gross world product) increases either if world production – global output – increases or if world prices increase. A major reason – but not the only possible reason – for increasing world prices is world inflation.

World public debt increases next year if the world's fiscal deficit is greater than the increase in gross world product (GWP). Essentially, there are three possible reasons for an increase in world public debt: a big global fiscal deficit, a small (or negative) increase in global output, or low (or negative) world inflation. Commonly, then, rising public debt – as appropriately measured – is a result of slow economic growth and/or low inflation.

Conversely, world public debt decreases next year if the world's fiscal deficit is smaller than the increase in GWP. Essentially, there are three possible reasons for a decrease in global public debt (expressed as a percentage of GWP): a smallish global fiscal deficit, a largish increase in global output, or highish world inflation. Commonly, then, falling public debt is a result of economic growth and/or inflation.

The most painless route to 'acceptable' public debt – what is acceptable is in the eye of each beholder – is through inflation. Far from being 'economic public enemy number one', inflation is the market's method – capitalism's method – of maintaining healthy and sustainable financial relationships within society. The more that financial relationships are 'out of whack', the more inflation is needed to put things right.

(We note that policies to raise the inflation rate are not easy to achieve; in the two decades most famous for such policies – the 1930s and the 2010s – it actually proved extraordinarily difficult to use monetary or fiscal policy to bring about reflation. Cutting interest rates did not achieve the inflation sought. Wars, on the other hand, did achieve inflation in the 1940s and 2020s.)

Of course, an 'out of whack' financial community is one with relative losers and perceived winners. A healthy correction restores over-indebted losers to a degree of financial health, and reduces the winners' excessive winnings. That's why we are in a battle today between the elite classes (including left [Bidenite/Starmerite] elites and right [Luxonite] elites) and the working classes (including most small and medium businesses).

Class conflict is real. Our political elites – left and right – have a policy bias towards high interest rates and low inflation. Our elites favour an ever-expanding flow of financial incomes from the poorer people to themselves. As debt-owners, they do not want inflation to make prevailing debt relationships more sustainable. (Smart elites might have more foresight than regular elites. Though 'smart elites' may be an oxymoron.)

Fiscal probity, its obsession and its distraction

Public debt is presented as a monster; public debt is posed as a fundamental cause of inflation. And inflation is posited as the problem which must be fixed before other problems are addressed.

When in the throes of (usually ineffective) inflation-fighting in the name of fiscal probity, the only thing that the established authorities allow as a distraction is the call to war. For some reason deep in the elite human psyche, financial probity has generally taken second place to the excitement of wars in which the elites become the generals and planners, and the working-classes become the planned.

We can easily see that the United States 'national' debt is on an upwards, not a downwards, trajectory; the Department of War can loosen Treasury's guard-rails more easily than the Department of Health. (This is true in Germany too, with last-year's partial removal of that country's debt-brake.)

Wars have always been drivers of public debt; they are inevitably financed by huge fiscal deficits. Intractable wars have also been levelling events, wealth-collapsing events – accompanied by inflation – eventuating in relatively good times for working class survivors.

Elites start wars. Wars finish or diminish elites. Elites are poor learners.

Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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