January 22, 11:00 am EST

With a government shutdown over the weekend, today I want to revisit my note from last month (the last time we were facing a potential government shutdown) on the significance of the government debt load.

The debt load is an easy tool for politicians to use.  And it’s never discussed in context.  So the absolute number of $19 trillion is a guarantee to conjure up fear in people – fear that foreigners may dump our bonds, fear that we may have runaway inflation, fear that the economy is a house of cards.  So that fear is used to gain negotiating leverage by whatever party is in a position of weakness.  For the better part of the past decade, it was used by the Republican party to block policies.  And now it’s being used by the Democratic party to try to block policies.

Now, the federal debt is a big number.  But so is the size of our economy – both about $19 trillion.  And while our debt/GDP has grown over the past decade, the increase in sovereign debt relative to GDP, has been a global phenomenon, following the financial crisis.  Much of it has to do with the contraction in growth and the subsequent sluggish growth throughout the recovery (i.e. the GDP side of the ratio hasn’t been carrying its weight).

You can see in the chart below, the increasing debt situation isn’t specific to the U.S.

Now, we could choose to cut spending, suck it up, and pay down the debt.  That’s called austerity.  The choice of austerity in this environment, where the economy is fragile, and growth has been sluggish for the better part of ten years, would send the U.S. economy back into recession.  Just ask Europe.  After the depths of the financial crisis, they went the path of tax hikes and spending cuts, and by 2012 found themselves back in recession and a near deflationary spiral – they crushed the weak recovery that the European Central Banks (and global central banks) had spent, backstopped and/or guaranteed trillions of dollars to create.

The problem, in this post-financial crisis environment:  if the major economies in the world sunk back into recession (especially the U.S.), it would certainly draw emerging markets (and the global economy, in general) back into recession.  And following a long period of unprecedented emergency monetary policies, the global central banks would have limited-to-no ammunition to fight a deflationary spiral this time around.

Now, all of this is precisely why the outlook for the U.S. and global economy changed on election night in 2016.  We now have an administration that is focused on growth, and an aligned Congress to overwhelm the political blocking.  That means we truly have the opportunity to improve our relative debt-load through growth.

In the meantime, despite all of the talk, our ability to service the debt load is as strong as it’s been in forty years (as you can see in the chart below).  And our ability to refinance debt is as strong as it’s been in sixty years.

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government shutdown, washington, wall street, economy