Red, White, and in the Red

Answer: That’s a valid concern, making it important to have a plan to invest in strong, profitable companies. This has a greater influence on long-term portfolio performance than macroeconomic factors like the national debt. But it’s still a concern, so let’s explore your question in more detail.

The national debt is the amount government owes creditors. This debt is largely due to the federal government spending exceeding revenue, which is primarily derived through taxes. When expenses exceed revenue, the result is a deficit. To offset this, the government borrows money. Treasury securities are sold to borrowers bringing in money, while increasing debt owed.

The national debt is over $37 trillion, representing 120% of our gross domestic product (GDP). This is six times higher than it was at the start of the 21st century. This is staggering yet doesn’t necessarily signal a direct threat to investors.

Deficit Growth

In most years under most administrations, the U.S. government spends more than it collects in tax revenue leading to deficits. Deficits tend to grow significantly during periods of economic stress, such as recessions or national emergencies. This is when tax revenues typically decline while government spending increases to stabilize the economy.

For example, the 2008 Global Financial Crisis and the 2020 COVID-19 pandemic were events that led to unusually large deficits. In response, the government increased support for individuals, businesses, and financial markets. As those crises eased, deficits gradually declined. It could be argued that the federal government’s ability to borrow and respond quickly helped prevent deeper and more prolonged economic downturns.

Metrics Matter: GDP vs. Household Net Worth

The United States continues to be viewed as a reliable borrower. This could be based on the fact that the total wealth of American households is over $160 trillion, nearly five times the size of our national debt. Viewed this way, the debt may appear more manageable, especially given the country’s overall financial strength. This broader perspective may help explain why financial markets continue to see the U.S. as a dependable borrower.

A Strong Balance Sheet: A Better Credit Risk Than Many Realize

While the U.S. national debt has surpassed $37 trillion, it’s important to consider the big picture. The federal government holds over $200 trillion in assets, including land, buildings, infrastructure, and natural resources. Though many of these assets aren’t liquid, they represent substantial value. Measuring debt against total assets—rather than GDP, which reflects annual income—offers a more accurate view of creditworthiness. This broader perspective shows that the U.S. remains one of the most solvent nations in the world.

Treasuries Have a Captive Audience

U.S. Treasury securities are considered among the safest and most liquid investments globally, making them highly attractive to a wide range of investors. Roughly 45% of U.S. debt is held domestically by pensions, mutual funds, banks, and individual savers—many of whom are required or incentivized to hold Treasuries for regulatory or policy reasons.

Interestingly, the federal government owns about 20% of its own debt. This doesn’t impact the country’s fiscal health since it's essentially money owed to itself internally. Foreign ownership accounts for just over 20%, with Japan being the largest holder due to its own historically low domestic yields. Diversified ownership helps stabilize demand and reduces the risk of market disruption.

China’s Holdings: A Shrinking Concern

China is the second-largest foreign holder of U.S. debt, but its influence is often overstated. Despite geopolitical tensions, China has gradually reduced its Treasury holdings without causing market instability. The idea that China could weaponize its debt holdings by selling off Treasuries is largely speculative and unsupported.

The Real Equation: Interest Rates vs. Economic Growth

The risk of rising interest rates depends on whether economic growth can outpace borrowing costs. If GDP growth exceeds the interest expense on debt, the U.S. can effectively manage and even reduce its debt burden over time. In this sense, debt can be useful, especially when used to fund infrastructure, innovation, or other growth initiatives.

Demographics: The Baby Boomer Wave Is Peaking

Concerns about aging baby boomers straining federal resources, especially particularly Medicare, haven’t materialized as expected. Although a large number of boomers have reached retirement age, Medicare spending has remained below projections, easing pressure on the federal budget.

Perspective Over Panic

Implications for investors and the economy are more subtle and refined than headlines suggest. The structure of debt ownership, historical context, and asset comparisons all imply a more stable financial foundation for the U.S. than many assume. We remain a highly credible borrower with deep resources, a strong balance sheet, and a global demand for our debt.

For investors, the most important takeaway is this: long-term portfolio success is driven more by disciplined investing in strong and profitable companies than by macroeconomic concerns like the national debt. The most effective strategy is to maintain diversification, emphasize fundamentals, and avoid reactionary decisions based on fear or speculation. This will likely continue to be the most effective strategy, regardless of the debt’s size. Stay focused and plan accordingly.