For the first time since 1946, the year after World War II ended, Washington owes the public as much as the whole economy produces in a year. Debt held by the public stood at $32.2 trillion on Sept. 30. Thursday's growth report filled in the last piece of the year's GDP. Divide one by the other and you get 100.03%. The Journal's Richard Rubin had the story on Friday, Oct. 30.
Two numbers get mixed up here, so let's keep them apart. Gross federal debt recently passed $40 trillion. That bigger number counts IOUs the government writes to itself. The Social Security trust fund, for one, holds Treasury bonds. Economists prefer debt held by the public, the $32.2 trillion, because it shows what the government owes to outside lenders. That's the number that just hit 100%.
The ratio was 99.4% a year earlier. The Congressional Budget Office had expected 100.6%, so the year came in a bit under forecast. The record is 106%, set in 1946 after the borrowing that paid for the war. The deficit for the year was nearly $2 trillion, or 6.2% of GDP. Revisions to the growth data could nudge the final ratio either way.
How we got from 33.7% to 100%
In 2000 the ratio was 33.7% and falling. A strong economy, spending limits and capital-gains taxes from the dot-com boom had the government running surpluses. In early 2001, then-Fed Chairman Alan Greenspan worried aloud about what would happen if the country paid off all its debt. It didn't happen. Over the next 25 years Congress passed repeated tax cuts and spent heavily on emergencies. Those included the Sept. 11 attacks, the 2008-09 financial crisis and the Covid pandemic. An aging population pushed up Social Security and Medicare costs. Both parties held the pen at different times. The ratio has about tripled since 2000.
Two things matter more than the milestone. The first is Social Security. Its trust fund is projected to run short in 2032. Under current law, benefits then get cut automatically unless Congress acts. The second is interest. CBO projects net interest costs will climb by more than 1% of GDP over the next decade. That forecast assumed rates well below today's. Each 0.1 point above CBO's path adds $379 billion in interest over ten years. The 10-year Treasury closed at 4.988% on Thursday, Oct. 29, after 5.044% the day before.
Our read
Our read, Fixed Income · IN02, with a Retirement · M10 footnote that's really the headline. Heavy borrowing is one reason the 10-year sits near 5% while the Fed's own rate is 3.75% to 4%. Lenders want more to hold a long IOU from a borrower who keeps borrowing. That's the case for keeping safe money short. Our model books hold Treasury bills and floating-rate paper, SGOV in 49 books and USFR in 14. They've avoided long duration, meaning bonds that take many years to pay back and swing hard when rates move. A long-Treasury fund still sits in four older books. Nothing added. We'd call long duration a watch, not a buy, and the debt math is why.
The connection for most readers isn't the bond market. It's the Social Security line in your retirement plan. The paper doesn't print the size of a 2032 cut, so we won't either, and nobody should treat the date as certain. Still, a plan that only works if that check arrives in full forever has one assumption doing all the lifting. This week, open your Social Security statement and find your estimated benefit. Rerun your retirement numbers with that line reduced starting in 2032. If the plan still holds, good. If it doesn't, you've learned it with years to adjust instead of months. We're glad to run that test with you in a review. You find out where the roof leaks on a dry day.