On Super Bowl Sunday, President Trump announced that the penny, a coin that has been in circulation since 1792, will no longer be minted. For as long as America has had a penny, it has also had a national debt, and there has recently been a discussion of how much debt is too much.
The penny has become a microcosm of our financial issues. We collect a penny in revenue but incur three cents in costs. The penny-minting business runs a deficit, just like much else in Washington.
In order to keep our financial system operating smoothly, it is time for Washington to address the question of the debt limit.
Always a political minefield, Congress is supposed to set the credit limit on its own credit card. But for eight of the last ten years, it has given itself unlimited credit by suspending the limit altogether. Congress is now considering raising the debt limit beyond the existing $36 trillion.
But how far can Congress safely go?
In our personal lives, we are all aware that there is a limit to how much can be borrowed on a house or automobile. A banker will ask two questions before approving your loan: how much you earn and what you owe. He is seeking to determine if you have the capacity to handle a certain amount of debt.
It is no different as a nation. What we earn is the revenue generated by taxes, and what we owe is reflected in the interest paid on the nation’s debt. This reflects the nation’s debt capacity, or how much more debt we can take on without bringing the nation to an existential crisis.
The dire warnings that filled the media when the debt was $10 trillion, $20 trillion, or even $30 trillion failed to materialize. But there must be a limit. Our rate of acquiring debt has been accelerating. At some point, the United States will pay the price for failing to slow the rate at which we go into debt.
The E.U. limits its members to 60% of their GDP in debt. Studies have shown that somewhere between 60% and 90%, a nation’s economy begins to suffer. This is because each of those dollars invested in the debt is a dollar not invested in the latest technological innovation or capital expenditure to increase production in private enterprises. As the debt continues to grow, more dollars are taken away from private industry, restricting the ability of the nation’s GDP growth rate.
Our current public debt represents 97% of the GDP.
How much debt a nation can safely carry depends on the nation’s savings rate, along with interest and inflation rates.
The vast majority of U.S. debt is held by the public, which includes corporations, foreign nations, and everyday Americans, who typically hold debt through their 401Ks and pension funds. These Americans also put money aside for investment and retirement, planning for their future. These funds can be invested to finance innovations and product development. Or they can be invested in government bonds, which are considered safe. But with every bond purchased, less innovation is financed and our GDP suffers.
Less innovation also means fewer new jobs are created, so less money will be saved. There is a cliff at which the savings are too low and the cost of paying interest on the debt is too high, so America would fail to pay its bills. That won’t happen at $36 trillion. But will it happen before the $50 trillion debt the Congressional Budget Office expects us to hit within the next seven years? Some experts say yes.
Don’t be deceived—those who buy America’s bonds understand this truth and will demand higher interest yields to offset the risk associated with running too high a debt. Fitch Ratings determined that America’s risk had increased when they downgraded America’s bonds from AAA to AA+ in 2023. As bond yields increase, our debt capacity decreases, and there is only so much capacity remaining.
On the bright side, $50 trillion doesn’t have to be the final limit. When everyday Americans get a raise, they can handle more debt—and the same is true of a nation. A growing economy brings in more revenue. Effectively, the nation gets a raise, leading to the ability to manage a bigger—though not unlimited—debt.
President Trump stated that minted pennies cost us more than two cents to make ( “so wasteful,” in his words) and decided to change the direction of America’s coinage. We must do likewise with the debt limit. It is time to take bold action to get America’s finances under control and manage them in a responsible manner.
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