No doubt, Uncle Sam’s outstanding obligation of $35 trillion – yes, that’s trillion, with a “T” – looks like a very, very big number. Also consider that in 2020, the total was “only” $27 trillion. Debt fears feel so right. And Trump’s promised tax cuts are dead ahead. Eek!

But it’s also true that pundits and politicos have been saying this – shrieking this? – for many, many years.

Uncle Sam’s outstanding obligation of $35 trillion – yes, that’s trillion with a “T” – looks like a very, very big number. Getty Images for the Peter G. Peterson Foundation

This may be the most controversial claim I’ve made in this column yet, but I’m not afraid – and more importantly, you shouldn’t be, either. That’s because when the numbers are sorted out in real terms, Uncle Sam actually has less debt than years’ past, not more. 

If that sounds like malarkey – and with all the noise, one certainly couldn’t be blamed for being skeptical – please allow me to explain.

The key point to understand here is that US debt is issued in US dollars. The other key thing to understand is that the value of those dollars has been shrinking drastically, courtesy of a multiyear, pandemic-induced tidal wave of inflation.

The upshot: the US’s real repayment costs on its debt also have shrunk drastically. Since COVID, official inflation rose fully 20%. But you and I know that  it was really more than that – maybe 30%. So, 2020’s $27 trillion got shrunk in real repayment terms by maybe $6-8 trillion.  

Honey, they shrunk the debt! Or, put another way, inflation is your enemy, but it’s Uncle Sam’s friend – always. Rick Moranis in the 1989 film “Honey, I Shrunk the Kids.” ©Buena Vista Pictures/Courtesy Everett Collection

Honey, they shrunk the debt! Or, put another way, inflation is your enemy, but it’s Uncle Sam’s friend – always.

As I have detailed in multiple past columns like this one: Excess central bank money creation sparks subsequent inflation, which is finally followed by wage growth. Excess money creation, then inflation, then wage growth. Always, always, always. 

Later still, Uncle’s nominal income rises — from more, but devalued, tax dollars. 

Factset, Congressional Budget Office

Ever wonder why the Federal Reserve wants 2% inflation?  Why not zero? Well, 2% seems small but really helps manage Uncle’s debt. Simple arithmetic. In 2024, the debt grows about $1.5 trillion, maybe $1.7 trillion maximum. But, 2% inflation decreases 2024’s $35 trillion of debt in real, after-inflation value by $700 billion—offsetting almost half the $1.5 trillion … Functionally vaporized!   

And the rest? GDP is $29 trillion. With 2% inflation and 2.5% real economic growth, GDP grows 4.5%–or $1.3 trillion.  Uncle Sam, in addition to the $700 billion inflation benefit, gets roughly $250 billion of that back in increased income tax. Subtract those two figures from, let’s say the high end of the US debt growth estimate of $1.7 trillion, and that leaves $550 billion in new debt.

United States Treasury

We’ve been discussing Uncle’s “total debt”. It hardly matters. That’s partly because since 2021, $1.3 trillion of its newly created debt was issued to its own agencies, kinda like their piggybanks, or like you lending to your spouse. No net interest paid out and nobody to foreclose. 

What does matter is what is called the “net debt” owed by Uncle to those outside of Uncle.  Accounting for that eliminates all but $250 billion at the most of what was left above.

We’re early in Uncle’s income catching up naturally from post-2020 inflation. It will — keeping Uncle’s debt servicing costs relative to its revenue below history’s highs—fully at or lower than the 1980s. Fact. We were ok then. We’ll be ok now.

since 2021, $1.3 trillion of its newly created debt was issued to its own agencies, kinda like their piggybanks United States Treasury

Another fact:  If we really were approaching a true debt crisis, long-term interest rates would be already maybe twice where they are now…or nose-bleed higher. The bond market prices reality, not hyperbole. How stupid do you think long-term lenders really are?   

More debt isn’t desirable. What’s really bad is government spending increasing as a percent of GDP — the growing vampire on our back. As I learned via Milton Friedman in the 1960s, if Uncle spends it….we pay for it, one way or another, via hiked tax rates or inflation or both.  

So, for now, don’t let the debt-phobics scare you. Sweat Uncle’s spending. Don’t sweat the debt. 

Honey, they shrunk it.

Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries globally.

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