The national debt, inflation and borrowed burgers

Margaret R. McDowell
Walton Sun

“Every day, several times a day, a thought comes over me; I owe more debts than I ever can pay back ... More money than I’ll ever see.” — from “The Debt I Owe," as performed by Lou Reed

Last week’s topic about inflation, and how little concern my firm harbors about it in the current economic environment, leads us to today’s concluding column on the subject.

Since September of last year, the national debt has grown from $22.7 trillion to $25.4 trillion as our government has ramped up spending in the face of COVID-19.

Any shortfall in government income vs. spending is considered part of the annual deficit; the cumulative net borrowing over many years comprises the national debt. Our debt has exceeded our GDP, which used to be viewed as a fiscal Rubicon, for some years now.

Here is a startling idea. We will never pay off our national debt. Perhaps more surprising is that most economists think it’s wise not to.

Right now the government can borrow money for 20 years at an interest rate of around 1%.

If inflation remains a steady 2%, which it more or less has for the past decade, then in real terms the government is effectively borrowing for free. The money still has to be repaid eventually, and borrowing today means less can be spent tomorrow, but if the funds are used wisely it’s not a bad bargain for the taxpayer.

Say that in 2040, when those newly issued 20-year bonds come due, each dollar repaid will be worth around a third less than the original borrowed dollar, assuming 2% inflation.

We are borrowing a hamburger today, and enjoying it for lunch, and we’re going to give back two thirds of a hamburger two decades from now.

People often ask a simple and intelligent question: Why do we have debt at all? The answer, of course, is that we don’t want to pay more taxes and we don’t want to accept less in government benefits. Thus, the only solution is to borrow the money.

Using the credit card analogy, it is likely that the U.S. will never zero out its credit card bill. But does it really need to if it can constantly roll its debt over at rates close to zero and can always print more money if need be?

That said, if we went through the federal budget line by line and eliminated all wasteful spending, of which there is plenty, we could probably balance the budget annually and eventually erase the debt.

Currently, we have no choice but to borrow. The shock of COVID-19 has decreased tax revenue and increased the amount of government spending that kicks in during downturns.

If we keep running deficits of this magnitude, though, it will eventually come back to bite us. But no one can say for sure at what point that will occur. With interest rates close to all-time lows, it doesn’t appear that it will be an issue any time soon.

Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 —, a “fee-only” registered investment advisory firm located near Sandestin.