US Government Debt Is Shrinking

US Government Debt Is Shrinking
Reda Farran, CFA

over 1 year ago1 min

Soaring inflation’s been getting a lot of bad press this year, so much so that one of its more positive consequences has slipped under the radar: US government debt is shrinking fast. Now, it’s not dropping in absolute dollar terms – in fact, that’s still growing by the day. But it is decreasing in the way it matters most: debt relative to the size of the economy, the latter of which has now been puffed up by the steep rise in prices. That’s what the graph above shows, and it signals that the US government’s debt (relative to GDP) is set to post the biggest drop in at least two decades.

That’s a big deal: a lower debt-to-GDP ratio reduces the perceived risk of US government debt, while also making any borrowings easier to pay back – a welcome relief for both the government and taxpayers who would otherwise have to foot the bill. It’s not great for bondholders, mind you, since the money they’ll be repaid by the government will be worth a lot less than what they initially put up.

Thing is, this year’s drop in debt-to-GDP could just be a quick blip. After all, most economists believe the outlook for the US economy involves a sluggish concoction of slower growth, lower inflation, and bigger interest payments for the government to make. Or in other words, a triple threat poised to send the US’s debt-to-GDP ratio rising straight back up.

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