U.S. Debt Surpasses GDP: Why Mortgage Rates Could "Spiral" From Here

0:00Dave:The U.S. just crossed a threshold that we haven't seen since 1946. And it's not a milestone we should be particularly proud of. Our national debt just surpassed our total gross domestic product. And the last time this happened was right after five years of fighting a world war. As of last week, we're at that point again. But what is the cause this time? Why has our debt ballooned so much in recent decades? And does it even matter? We keep hearing the debt is going up, but by many measures, the economy is still resilient. Certainly, there hasn't been any crises in recent years. But debt does matter.

0:45Dave:And if we stay on this path, our debt could be a drag on our economy and the housing market for decades to come. So today on On the Market, we're going deep into the issue of our national debt. how we got here, what the recent data shows, what could happen next, and what it all means for real estate investors.

1:09Hey, everyone.

1:10Dave:Welcome to On The Market. I'm Dave Meyer, Chief Investment Officer at BiggerPockets. Today on the show, we're digging into an issue that everyone is surely aware of, our massive national debt, but not many people fully understand, or at least understand fully why it's so large, what the current trajectory is, and what could happen to the economy and to the housing market if our debt keeps growing. We're doing this now, today, we're going to dive into this because last week we hit this milestone with our debt. Our debt total is now$31.27 trillion. And our GDP, in other words, the total size of our economy is$31.22 trillion, so slightly lower.

2:01Dave:But our debt is now bigger than the entire economy in one year. And it's not like this milestone in particular, like crossing this particular threshold triggers anything imminent in the economy. but it's a reminder that our debt is absolutely not under control. It's getting worse and potential implications keep getting larger. So today I'm gonna break it all down. The recent history of our debt, why it's so large, why it keeps growing and what it means for you, for me and the entire global economy. This is an important topic you really should understand even though a crisis might not be tomorrow, the stakes are high here.

2:46Dave:And I want you all to understand what those stakes are. And I think after today's episode, you will. One more thing before we get into this, I gotta ask you all for something. I am honestly terrible at asking for reviews, but today I actually remembered. So if you're a frequent listener of the show, or if you really liked this episode, please give us a like on YouTube, subscribe on YouTube so you can hear more, or if you're feeling extra generous, leave us a review on Apple or Spotify. It really does mean a lot to us. So with that, let's get into our conversation about debt. And we're going to start with the big picture.

3:25Dave:Why? Why is our national debt so big? We've always had debt in the United States, actually. It goes all the way back to the Constitution, 1789. There were a couple of years there where Andrew Jackson started to shake things up a little bit and we didn't have any debt for a little bit, but we've pretty much always had debt as long as we've had a country. And debt is not necessarily a bad thing, right? A lot of economists argue that increasing government spending spurs the economy. And there is evidence to back that up. And as real estate investors, I think we all sort of get this, right? We know that there are good applications of debt and there are dangerous applications of debt.

4:10Dave:And a lot of the history of the United States, we've accumulated debt during very important critical moments for the country, like winning World War Two. For example, the last time our debt to GDP ratio was as high as it is now, right after World War Two, I think most people would argue good use of debt, right, worth doing it. So as you can see, it's not necessarily always a bad thing. But we'll get back to this idea of good debt, bad debt in a little bit. Let's just stick with the history here for a minute. For the most part, debt in the United States has come around either wars or crises. So if you look back at the big spikes in national debt, you see the Revolutionary War, the War of 1812, the Civil War, World War I, World War II, or things like the Great Depression, where the government spent a lot of money during the New Deal to try and get us out of the Depression.

5:04Dave:All of that stuff drove debt. But after those crises were over, after those wars were over, usually the deficit receded and we would reduce our overall debt during the quote unquote normal times. However, since about 1980, we've entered a different era where we basically have structural deficits built in to the budget for the government. Basically, that means we operate at a loss every single year. And I want to clarify sort of two terms that I'm going to be using a lot in this episode. The first is the total debt, which is what I've been referring to so far, which is the$37 trillion of aggregated debt that this country has built up over its lifetime, 37 trillion total debt.

5:55Dave:Then there's a deficit or a surplus. That's basically what happens in a given year. So if I say that the deficits went down after the war, that means that maybe in the following year in 1947, we collected more tax revenue than we spent that year. But the total national debt was still positive, right? We still had debt, even though that year we were making money as a government instead of taking a loss with the deficit, right? Hopefully that makes sense. Okay, so now let's just like hone in on this situation from basically 1980 till now, because that's when things really change. You can look this up.

6:33Dave:I will throw the chart here for anyone who's watching on YouTube. But basically, you could see for most of US history, the debt grew, but it wasn't exponential growth. Then starting in 1980, things just really started to take off. And then since about 2005, things have gotten even crazier. So back in 1980, total U.S. debt was about$863 billion. Again today,$37 trillion. Now that might not sound like a big difference because we have gotten very used to in this country throwing around huge numbers. Oh, in COVID, we printed$2 trillion. Or this new project, a football stadium, cost$10 billion. You know, these sound all like huge numbers, but the difference between about $900 billion in 1980 and$37 trillion is enormous.

7:24Dave:That is 40 times higher. Just to throw that out here, that is 4 ,000 % growth in debt that this country has taken on since 1980. Now, if you adjust that for inflation, which you should because it's the right way to do this analysis, it would be about 11 times higher. So our debt has grown 11x in 46 years. And you might be thinking, well, that's OK because GDP has grown. Our economy has grown. And that's true. But compare that 1100 percent growth in our debt since 1980 to GDP of just 230 percent. Right. That is not that much. I mean, 230 percent growth in GDP is solid. But our debt grew 1100 percent during the same time.

8:12Dave:Back in 1980, our debt was 35 percent of the economy of GDP. Today, it just surpassed 100 percent. So what the heck happened here? Right. Like what happened since 1980 that has caused the debt to take this completely different trajectory than it was on for basically 200 years? Now, there are four sort of big picture buckets that I'm going to sort these things into that you should pay attention to. Number one is sort of these things that we call mandatory spending. These are big, huge government programs where the spending is quote unquote non-discretionary. Like the bills and the laws that enacted them require these things to grow over time, regardless of tax income.

8:59Dave:So these are things like Social Security, Medicare and Medicaid. And the expenses for those things are going up a lot. This is really a significant portion of why our spending is so high is because first and foremost, we have boomers as a huge generation. They need that health care. Right. And they are drawing on instead of contributing to Social Security. And there are a ton of them. We are also seeing people live a lot longer. So the number of years that they draw Social Security or they draw health care that's subsidized by the government is longer. So that is a major bucket here. And this spending is actually projected to keep growing, even though we know Social Security is not even fully funded past 2035.

9:47Dave:So we'll see what happens there. But it is projected to keep growing. Another giant piece and growing piece of mandatory spending is just interest. Right. The U.S. government has debt. We all know this. You have a mortgage. You have to pay that every month, right? The U.S. government has to pay the people who have lent it money in the form of bonds and treasury bills back. And so right now, actually, if you look at our national budget, 14 cents of every dollar the federal government spends goes to just paying interest. That's not services. That's not defense. That's not Social Security. It's just paying interest.

10:27Dave:And again, that's got to get paid. That is really big. So those are two large spending areas that are really non-discretionary, right? Like that's one of the reasons I will get more into this, that things haven't changed is because these are just huge buckets that can't really change, at least unless there's a huge overhaul in our entire federal budget, which is possible hasn't happened. The third bucket after these required spending is just tax cuts. Since 1980 and Ronald Reagan, tax rates have just come down a lot. Reagan cut top tax rate from 70 percent to 28 percent. We've had two big tax cuts with President Trump in 2017 and 2025.

11:10Dave:And although there is some theory or a lot of these tax cuts are proposed as not reducing tax revenue because they we will grow our way out of that. There's actually just not any evidence of that, that tax cuts are stimulating the economy enough to offset the potential loss in revenue. Right. Reagan himself grew the deficit one hundred and eighty six percent. Right. Part of that was tax cuts. Part of it was because he increased the defense budget by 30 percent. But that's just, you know, like we didn't grow our way out of it when he cut taxes in the 1980s. And as you'll see, is a trend here throughout this episode.

11:50Dave:It is not just tax cuts or those spending increase. It's a combination of both. So the last bucket, and just as a reminder, we had mandatory spending in the terms of Social Security, Medicare, Medicaid. We have interest payments. We have tax cuts. And the last thing that's really changed since 1980 is that we're no longer running a deficit only during crises. We just basically continued to do this forever. That's just a political shift that's happened. We used to pay off the debt from a war or a financial crisis. Now we just keep spending, right? Like we've seen, you know, between George W. Bush and Barack Obama during the financial crisis, government increased spending, took on a lot of debt to stimulate the economy, get out of that crisis.

12:35Dave:That's a normal reaction to that. But budgets didn't really fall after that, right? We've just kept spending for the last 18 years after that. And so the debt just keeps getting bigger rather than using debt and using government spending to help during times of national need. We've just this has become the de facto. And so these four things together, these increases in mandatory spending, reduced revenue through tax cuts and just this political shift where people don't feel like we need to balance the budget anymore. That's why the debt keeps growing. And yeah, that's why we have these huge deficits since 1980.

13:15Dave:And I just want to call out, I don't want to make this overly political. And I know a lot of this can get political, but I just want to state a fact here. And you can look this up if you want to. Both parties do this. It is both Republicans and Democrats since 1980 who have contributed to this massive debt. The only president in the last 46 years to have a surplus was Bill Clinton, who ran a surplus from 1996 to 2000. The deficit has increased under every other president. Reagan added almost$2 trillion to the deficit, almost 200 % growth at that time. George H.W. Bush added$1.6 trillion. Like I said, Clinton ran a surplus for at least half of his presidency.

14:00Dave:Debt to GDP fell for a time, only time in the last 50 years. But then since 2000, things have gotten really wild. George W. Bush surplus went to almost six trillion dollars in eight years. Obama over eight trillion dollars in eight years. Trump's first term, eight trillion dollars in only four years. Biden, seven trillion dollars in just four years. And Trump's second presidency. We'll see. But this year alone, we're already in May. we've already contributed over$1 trillion to this point in the year. The One Big Beautiful Bill Act is projected by nonpartisan analysts to add$5 trillion to the deficit.

14:44Dave:And as of right now, we are adding$1 trillion to our deficit every 100 days. That is wild. It has been basically nonstop for 26 years, right? Some people blame too much spending. Some people blame lower taxes, but it's the combination. Tax cuts without spending cuts haven't worked. And let's be honest, neither party is cutting spending. We heard Doge was going to do it, right? That was a failure. The deficit has grown a lot since that happened. Doge claimed they have cut$100 billion in savings. If you look at independent analyses of how much was actually saved, it was close to$2 billion, right?

15:28Dave:So big discrepancies there. But honestly, it doesn't even matter, right? If it's 100 billion or 2 billion, that's a drop in the bucket. Even $100 billion is meaningless. I know that's crazy, but like, right in the face of a almost$40 trillion deficit, it's$100 billion, right? So this is the situation we're in. We have mandatory spending, interest payments, tax policy under many presidents of both parties have gotten us here, right? And frankly, when we start to look forward about what's going to happen from here and what's this means, it does not seem like anyone is seriously looking at solving this problem.

16:06Dave:Like there is no real policy on the table at all from either party about how we are going to reduce the deficit. It just keeps getting worse. When one party is in power, the other one seems to get very serious about lowering the debt. Then the other party gets in power and then the other party gets very serious about lowering the debt. It is a bipartisan problem that no one wants to own. Neither party seems willing to raise taxes or address the spending issues. Because honestly, if you look at what you'd have to cut, it's dangerous politically, right? Like if you just think about how these politicians are probably thinking about it, you'd have to cut Social Security, Medicare, defense.

16:52Dave:Those are things people do not want cut, right? Everything else is frankly trivial. People say we spend too much on education or on infrastructure or whatever it is. Honestly, that stuff doesn't really even matter in the big picture. If you look at our federal spending, about roughly, I'm just going to round, 60 % of spending by the federal government goes to that mandatory spending category. 60 % goes to Social Security, Medicare, Medicaid. Our interest payments, 14%, right? So that's roughly 75%. You see what I mean here? roughly three out of every$4 our government spends goes to Social Security, Medicare, Medicaid, or interest payments.

17:37Dave:Everything else is 25%, including our defense budget. And if you actually want to break it down a little bit more, about 50 % of that discretionary spending goes to defense. So everything else, everything else that our government is like 12%. So yeah, You could cut stuff, you know, transportation, international affairs, education, health care programs, veterans benefits, all of that stuff if you want to. But it's 12 percent of the total budget. All of that stuff combined. Everything else is interest, Social Security, Medicare and Medicaid. So, again, just my opinion. But this is why I don't think the problem is getting fixed, because no politicians are willing to cut these things.

18:25Dave:You can't cut interest payments. Right. They don't want to cut Social Security, Medicare, defense. Nothing else would amount to much. Now, Democrats want to fix it by raising taxes, but haven't done so in a way that reduces the deficit. Republicans want to lower taxes to grow our way out of it, but that hasn't shrunk the deficit either. So that's where we're at. But fortunately, it hasn't really mattered that much yet, right? Like, yes, we see this debt on a, you know, on the national debt clock or you can look it up. But as of right now, there hasn't been a crisis. So people are wondering, like, does it matter?

19:07Dave:GDP has been growing. Unemployment remains pretty low. It hasn't blown up yet. But we should ask, what happens from here? Can this keep going on forever? However, if we're saying that the momentum is that the debt is going to keep growing, does this have an endpoint? Or can we just keep kicking the can down the road? And what does all of this mean for real estate investors? We'll get to that right after this quick break. Stick with us. Most deals don't fall apart because of the numbers. They fall apart because of the financing. You find a property that cash flows. The deal makes sense. But then the lender looks at your personal income, your tax returns, your debt to income ratio, and suddenly the deal doesn't qualify.

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22:04Dave:Welcome back to On the Market. I'm Dave Meyer. Today, we're talking about our national debt, and we're going to pivot our conversation here to just talking about where this thing is going. Now, could the situation get better? Maybe, right? Situation could get better. I think you have to think about what could happen. We could either, one, grow so fast that revenues increase, right? That seems to be the Trump administration argument. They have said that they believe if GDP grows at a 4 % annualized rate, that it will shrink the debt ratio that our national debt will decline. It's possible. There is no evidence of that working in the past, right?

22:40Dave:If you just look at other tax cuts we've had over the last 50 years, deficits still grew. National debt still grew during that time. Not to mention that Trump administration has said GDP has to grow at 4 % for that to happen. we're at 2 % right now. So we don't even know. We can't even test that thesis right now because GDP isn't growing fast enough. Second thing we could do to bring down the debt, raise taxes, bring in more revenue. Haven't seen that happen. Third, significant entitlement reform, you know, revising Social Security, Medicare, Medicaid to bring down spending. Haven't seen any serious proposals for that.

23:17Dave:Some combination of the three, probably the most realistic, right? Like you're not gonna just do one of these things and have it erase$40 trillion of debt. It probably has to be some combination of these things, but there doesn't seem to be any momentum on this, right? In fact, we're going in the wrong direction. The deficit, the annual deficit, not just the debt, the annual deficit is getting bigger, right? We're on track for potentially$3 trillion this year alone, right? So that's the trajectory we're on. And so maybe it will get better, but personally, I think the prudent thing is to plan for this to continue.

23:54Dave:Maybe you believe that things will get better, but the evidence shows it's just going to get bigger and bigger, right? Even though there's been no crisis so far, I think we need to talk about what could happen. Now, one option is that nothing happens, right? Japan, you look at Japan. They have had a 200 % GDP to debt ratio for decades without a crisis. It's been fine, right? So that might happen. But there are two other scenarios that we should account for. And I just, I want to say here that I'm not predicting these things are going to happen. Like I do on the show every day, I like to talk about scenarios and help educate you all on things that could happen just so you can keep it in your mind and position yourself.

24:38Dave:There are risks with a ballooning national debt. Whether that will come to a head and when is anyone's guess, like, right, we don't know. But the risks here are significant and they are significant enough to me in my personal investing and the way I allocate my money that I am accounting for this. And so that's why I want to go into these scenarios to explain to you all what might happen. So again, first scenario, nothing changes. Markets don't care, right? U.S. reserve currency status provides us with padding. That is true. That does really help us. No one freaks out. Lending costs largely remain the same.

25:16Dave:And then eventually some combination of those things I just talked about happen and we get things under control. Like that is the best case scenario, right? Like, let's all hope that is what happens. The second scenario is that the markets, quote unquote, the markets, the people who invest in the United States, who lend money to the U.S. government, force a reckoning. If these people who buy U.S. treasuries decide that the U.S. is not being fiscally responsible and that they are likely to do something called monetizing the debt, perhaps print their way out of all of our debt, thereby reducing people's real inflation adjusted return, it could trigger a cascade of negative outcomes for the economy.

26:03Dave:And in short, just to, you know, TLDR, basically this negative outcome is that borrowing costs go up. Like, I know that doesn't sound that crazy, but I'm going to explain how this can create like a whole spiral here. But basically, people say, you know what? The U.S. government is being irresponsible. We don't want to lend them more money at a 4 % rate for 10 years. We require 5.5 % to account for the risk of inflation. That could happen. And what really matters here is confidence. It really matters if whether the buyers of U.S. Treasury bonds continue to believe that they will be paid back at a real and by what I say when I say real, I mean inflation adjusted rate of return.

26:48Dave:This real rate of return is really important because the U.S. government will not default. It's no one is seriously worried about the United States not paying their interest payments on their debt. Do you know why? Because they own the printing press, right? They own the mint. They can print more money anytime that we want. That is, some would say the pros, some would say the cons of a fiat currency, right? They can print. So they're not going to default. The risk to the people who own these bonds is that we will print so much money. This is what is called monetizing our debt. We will print so much money just to pay off our interest on these debts that the real rate of return, the inflation adjusted rate of return will go down because you're lending the government money for 10, 20, 30 years, but they've printed so much money that when you're getting those interest payments 20 years from now, the money is basically worthless, right?