Why the national debt might finally matter

Summary

Episode Summary: "Why the National Debt Might Finally Matter"

Search Engine dives deep into the complexities of the United States national debt, exploring its historical roots, current dynamics, and potential future implications. Hosted by PJ Vogt, this episode features insightful discussions with Brendan Greeley, a PhD candidate specializing in the history of money and finance, and Noah Smith, an economist renowned for his analyses on federal spending and debt. The conversation unpacks fundamental questions about who holds the national debt, the risks of default, and the broader economic consequences of America's borrowing habits.

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1. Introduction to the National Debt

The episode opens with a listener question from Ronald Young Jr., who grapples with understanding the concept of the national debt. Ronald contrasts national debt with personal debt, wondering, "Who owns the debt of the United States?" and expressing confusion over the abstract nature of government borrowing compared to tangible personal liabilities like credit cards or student loans.

Ronald Young Jr. [04:21]:
"We got to cut this wasteful spending, decrease the national debt. We got to decrease it because it's bad for the economy. It'll explode, all that."

PJ Vogt empathizes with Ronald's confusion, highlighting the abstract nature of national debt compared to personal debt and sets the stage for a comprehensive exploration of the topic.

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2. Historical Roots of American Debt

Brendan Greeley provides a historical lens, tracing the origins of American debt back to the colonial era. Before the American Revolution, colonies struggled with a lack of physical currency, relying heavily on silver imports and navigating restrictive British policies like the Navigation Act, which impeded global trade.

Brendan Greeley [13:57]:
"The promissory note was just a piece of paper that had a promise written on it. You and I don't know each other. I don't know that I could write you a promissory note, but I know your executive producer, Sruti, very well."

Greeley explains how early American economies depended on promissory notes—private IOUs—as a form of money, emphasizing that debt and credit were integral to economic transactions even before the advent of physical currency like the US dollar.

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3. Evolution of the National Debt: From Hamilton to Modern Day

Brendan delves into the establishment of the national debt system by Alexander Hamilton, who consolidated war debts into a centralized system of government-issued bonds. These bonds, backed by the government's promise to repay with interest, laid the groundwork for the modern system of treasuries and established the United States as a reliable borrower.

Brendan Greeley [20:37]:
"Increasingly, over the course of the 19th century, you see federal debt becoming a bigger and bigger part of the banking system and a bigger and bigger part of the bank notes that we traded around."

The discussion highlights how, over time, U.S. treasuries became a cornerstone of both national and global financial systems, trusted as stable investments and integral to the functioning of banks and international investors.

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4. The Shift in Debt Management Post-1970s

Transitioning to the late 20th century, Brendan explains a pivotal shift in how the U.S. managed its debt. Until the early 1980s, every new debt issuance was justified by specific needs like war funding or infrastructure projects, with Congress scrutinizing each addition to the debt.

Brendan Greeley [22:25]:
"For years, no matter who was in power, until the late '70s, early '80s, every new debt issue had to be approved for a reason."

However, with the advent of financial theories like monetarism advocating for reduced risk premiums on American debt, the U.S. began to borrow more freely, assuming that the global demand for treasuries would sustain low-interest rates indefinitely.

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5. The Global Reliance on U.S. Treasuries

Brendan likens the United States to the "Saudi Arabia of money," underscoring the country's unique position in issuing widely trusted and utilized debt instruments. This global reliance allowed the U.S. to perpetually roll over its debt, with countries like Japan and China investing heavily in treasuries as safe assets.

Brendan Greeley [24:08]:
"So one way of thinking of us right now is that we're the Saudi Arabia of money."

However, this dependency is now under strain as geopolitical tensions escalate, leading to actions like China selling off U.S. bonds, signaling potential shifts in global trust and investment patterns.

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6. Potential Consequences of a Sovereign Default

Noah Smith joins the conversation to elucidate the catastrophic implications of a sovereign default—where the U.S. might fail to meet its debt obligations. He explains that such an event would undermine the foundation of the global financial system, as treasuries are considered virtually risk-free and integral to financial models worldwide.

Noah Smith [31:12]:
"So, one way of looking at it is you could compare it to income. So the annual income of the United States economy is about $30 trillion."

Smith warns that a default could trigger a financial meltdown akin to, but worse than, the 2008 crisis, leading to bank insolvencies, skyrocketing unemployment, and a significant contraction of GDP.

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7. The Impact of Political Leadership on Debt Dynamics

The discussion turns to the role of political leadership, specifically critiquing former President Donald Trump's approach to debt management. PJ and Noah express concern that Trump's patterns of requesting bailouts and invoking bankruptcy in personal business could translate into the federal government's handling of national debt.

Unnamed Advertiser (Noah Smith) [41:09]:
"Because I think when you have a friend who's in debt, you don't just care about the amount of debt. You care about what did they buy with it."

Smith argues that Trump's tactics could erode global trust in U.S. treasuries, prompting foreign investors to divest and leading to higher interest rates, thereby exacerbating the debt burden.

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8. Current Debt Statistics and Future Projections

PJ provides current statistics, noting that the national debt stands at approximately $36 trillion, which is about 1.2 times the U.S. GDP. This ratio highlights the enormity of the debt in relation to the country's economic output.

Noah Smith [31:12]:
"The U.S. national debt is about $36 trillion."

As debt continues to grow without corresponding growth in productive investments, concerns mount about the sustainability of this trajectory and the nation's ability to manage its obligations without triggering economic instability.

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9. Final Reflections and the Path Forward

Brendan expresses skepticism about the United States' ability to effectively address the burgeoning debt, emphasizing the need for honest conversations about fiscal responsibility and strategic spending. He draws parallels to personal debt management, where the purpose of borrowing dictates the level of concern and approach to repayment.

Brendan Greeley [43:23]:
"I think important people in America who have Trump's ear pay attention to the price of Treasuries, pay attention to yields, the sort of imputed interest that America has to pay on Treasuries."

The episode concludes with PJ reflecting on the urgency of understanding national debt, emphasizing that awareness and informed dialogue are crucial as the U.S. navigates its fiscal future.

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Key Takeaways

• Historical Context: American debt has deep historical roots, evolving from private promissory notes to a globally trusted system of treasuries.

• Global Trust: The U.S.'s ability to borrow extensively has been underpinned by global trust in its financial stability, a trust that is now being tested.

• Risk of Default: A sovereign default poses severe risks not just domestically but also to the global financial system, potentially triggering an unprecedented economic crisis.

• Political Influence: Leadership styles and fiscal policies significantly impact the management and perception of national debt.

• Urgency for Action: Addressing the national debt requires strategic decision-making focused on productive investments and sustainable fiscal practices.

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Notable Quotes

• Ronald Young Jr. [04:21]:
  "We got to cut this wasteful spending, decrease the national debt. We got to decrease it because it's bad for the economy. It'll explode, all that."

• Brendan Greeley [13:57]:
  "The promissory note was just a piece of paper that had a promise written on it."

• Brendan Greeley [24:08]:
  "So one way of thinking of us right now is that we're the Saudi Arabia of money."

• Noah Smith [31:12]:
  "The U.S. national debt is about $36 trillion."

• Brendan Greeley [43:23]:
  "It's like having a friend who's in debt—you care about what they bought with it."

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Conclusion

"Why the National Debt Might Finally Matter" serves as a compelling exploration of a topic that often seems abstract but holds profound implications for the U.S. and the global economy. Through historical analysis and expert insights, PJ Vogt and his guests illuminate the intricate web of factors that sustain national debt and the precarious balance that the United States now faces. As global trust wavers and political actions threaten to destabilize long-standing financial norms, understanding the national debt becomes not just an economic exercise but a crucial component of safeguarding future prosperity.

Transcript

[PJ Vogt]

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[Brendan Greeley]

Sounded so serious.

[PJ Vogt]

Ryle, how's it?

[Ronald Young Jr.]

I was bouncing your energy man.

[PJ Vogt]

I know it was absolutely my fault. I was like. It's like we were about to, like, handshake before a duel for you or something.

[Ronald Young Jr.]

Yeah, it was coming.

[PJ Vogt]

This is Ronald Young, Jr. He's an audio producer, a storyteller, host of the podcast One. He's appeared on Search Engine before, answering a question for us. But now he'd written to us with a question of his own, and so we invited him back to tell us about it. It was a question about the economy.

[Ronald Young Jr.]

I am at a place where I think I'm a pretty smart person. I think I understand things. I understand stocks, I listen to Planet Money. You know what I mean? Like, I'm an NPR guy. I read, I understand numbers. And the one thing that I will never understand is the United States national debt. It is something that congresspeople run on, that the president runs on, that senators run on that Everyone is always talking about one way or another. We got to cut this wasteful spending, decrease the national debt. We got to decrease it because it's bad for the economy. It'll explode, all that. And I hear that. And when I think about having debt, you know, I pay rent, I had student loans, I have credit card debt. Like, all that, there's somebody that I owe money to.

[PJ Vogt]

Yeah.

[Ronald Young Jr.]

Like, you know what I mean? Like, you max out a credit card, somebody's coming to say, hey, you owe us interest. And also, if you don't pay this, we're going to take you to court, and then you might get your wages garnished, so on and so forth. But when I think about the national debt, I'm wondering who owns the debt of the United States? Like, when they say we have a national debt, who do we owe money to? That's so confusing to me. I don't understand who, what that means. And it feels like I need a new civics lesson here.

[PJ Vogt]

And is your question also, like, I, I'm. I'm kind of disorganized sometimes and not always great with money. And, like, I've had more money and less money at different times in my life. So I know what it's like when something goes to collections. I know what it's like when you get a phone call. And I don't understand if national debt. We're using the same words that we use for personal debt. But how much am I supposed to be thinking of the country as, like, me? Like, is it like, does, like, Donald Trump. Is it like, oh, I'm not answering that number? Because he know.

[Ronald Young Jr.]

That'S exactly it.

[PJ Vogt]

Ronald first emailed his query in February, who exactly are we in debt to? What happens when we don't pay those bills? At the time, it felt like one of those background questions that bobs to but never quite breaks the surface of my mind. You know, every time a budget has to get approved, experts talk about the national debt. Some people get upset. Most people quickly forget about it. Even the tea partiers seem to have disappeared. I was curious, but not urgently curious. But then our new president really started mashing buttons on the economy's gamepad and my curiosity heated up. Working on this story, I started to see how things I didn't know were connected to the national debt. Tariffs, our fight with China, Gina, all of it actually did connect to the bills we owe. After the break, how it all works and what it all means. We're going back to the very beginnings of American debt. This episode is brought to you in part by Harry's. Your facial hair can completely change your look, but to maintain your style, you need the best razors money can buy. Harry's makes incredible quality razors and shaving products that will help you keep your signature look. I'm a couple times a week Shaver I tried the Truman, which is just like a five blade razor. Totally worked for me. People in my life told me after I shaved my face that I looked younger and less tired. Harry's offers German engineered blades made in their own factory that stay sharp longer. Customizable delivery options for scheduled refills as low as $2, half of what you pay for other big brands and you can get a five blade razor weighted handle, foaming shave gel and a travel cover for just 3 bucks@Harry's.com search Harry's has the highest customer satisfaction in the shaving industry, and they have a convenient subscription option that you can cancel at any time. Define your look with the best shaving products at the best price from Harry's. Normally their trial set is $13, but right now you can get it for just $[e-mail] search that's our exclusive link Harry's.com search for a $3 trial set this episode is brought to you in part by Kinsta. Ever feel overwhelmed trying to manage your web hosting while juggling a million other tasks? Even if tech isn't your thing, Kinsta's Managed WordPress hosting is a relief. Their expert team handles it all. They've bundled up all the essentials to make sites stress free with speeds that'll wow your visitors, security that never sleeps, and a dashboard so intuitive you'll wonder why everything isn't this easy. And when you hit a snag, you'll talk to real humans. 24, 7, 365 actual people who get it, not AI chatbots. In short, Kinsta is perfect for those who want professional results without needing a technical background. Kinsta doesn't just host WordPress websites. They deliver blazing speed, ironclad security and reliability. Tired of being your own website support team? Switch your hosting to Kinsta and get your first month free. And don't worry about the move. They'll handle the whole transition for you too. No tech expertise required. Just visit kinsta.com searchengine to get started. That's K-I-N-S-T.com searchengine Welcome back to the show. Okay, so first things first. Can you say your name and what you do?

[Brendan Greeley]

Hi, my name is Brendan Greeley. I am right now a PhD candidate studying the history of money and finance. And for about 20 years I was a journalist, and for 10 of those, I covered the Federal Reserve.

[PJ Vogt]

Brendan has never been on mic at Search Engine, but his brain is in the show. Sometimes we go to him for help understanding economic concepts, inflation, taxes. Shruti, our show's editor, she knows him because they both worked at the Economist together a long time ago. He's quite sharp. So, okay, before we even get to the question, question, I have one of the, like, meta question I've been thinking about for the past couple days is like, I just like people's curiosity leads them to different places. I have never been somebody who thinks too much about markets. I definitely have not really ever thought very much about the national debt.

[Brendan Greeley]

Mm.

[PJ Vogt]

I think for me, part of what's going on, as often happens in, say, like, the last decade, is like, there's some reliably somewhat boring part of how the world or the country works. And then you find out it might be breaking and you're like, well, I guess I should understand this.

[Brendan Greeley]

Yeah.

[PJ Vogt]

But for you, like, as somebody who your life has just led you to think about markets and currency and stuff, like, was there some signal event early in your life that opened the door of wondering about this? Like, do you remember a time before you cared? And what made you start to want to know?

[Brendan Greeley]

Oh, that's. Yeah. So I was at Bloomberg businessweek as a features writer, and I was covering the tech industry in 2010. I was writing the same story over and over again about how, you know, the wireless carriers were ruining America and stealing all of our money. And I just, I bored myself. So I At the time, the profession of economics was changing because economists didn't really see 2008 coming. Economists have so much sway over the way we see the world. We have a National Economics Council, we have a Council of Economic Advisers. Like, it's actually confusing to people who cover this which organization does what, which body is inside the White House, which body is outside the White House. But they're all economists, right? We don't have a national sociologist council advising the White House or a national historian's council advising the White House. Economists, sort of alone among the social sciences get this much pull in our lives. So the way they see the world is massively important. And I began to realize, and this is still kind of what I do, that there are holes in the way they see the world. And one of those holes is history.

[PJ Vogt]

So Brennan went back to school, to Princeton to study that history. He's reexamining a story he spent much of his life with, the Econ 101 story of what money means. I was here just to answer a seemingly simple what does the national debt mean? And how worried should I and Ronald Young Jr be about? But Brendan's story drew me in. It went back further to how America invented its own notion of debt and how Americans decided how they should feel about it. Those ideas just have deeper roots than I imagined. Search Engine, before it Ends, will tell you the origin story of every single object or concept you've ever encountered. This week, the origin of money in America. Chapter One.

[Brendan Greeley]

Before the dollar, before the revolution, one of the biggest challenges that the colonies had consistently, people complained about it all the time, was that they didn't have money. And that doesn't mean that they were not wealthy. It meant they literally did not have the substance to hand to somebody else to clear a transaction. America at the time, or at least that part of America, doesn't really have any silver or gold wealth, which means it's got to come in from abroad. And England had done two things to make that even more difficult. One is they didn't allow the colonies to charter anything like a bank. And the other is the Navigation act actually meant that it was very difficult to trade with the entire world. And all the silver tended to come up from the Caribbean at the time. And that would come up to the colonies in return for some wheat, some hogs. But it had to come through the English colonies. There was some smuggling. Sometimes literally, pirates of the Caribbean would come up to Pennsylvania or sometimes even to Baltimore and sell their silver. So there was this competition among the colonies to see who could get the silver. The silver was important, again, not just as wealth, but as, like, ways to make sure that one person can pay another person. So 17th and 18th century textbooks for merchants drew distinctions between what they called at the time, real money and imaginary money.

[PJ Vogt]

Wait, were you reading colonial merchant textbooks?

[Brendan Greeley]

I don't know, man. We all do weird stuff for our professions.

[PJ Vogt]

Wait, so if I were a colonial merchant selling. I don't know what. What were the merchants selling?

[Brendan Greeley]

Depends on which colony you're talking about.

[PJ Vogt]

I'm Pennsylvania. I'm a Pennsylvanian in every version of my life.

[Brendan Greeley]

Then you're selling wheat and hogs south down the Delaware river to Jamaica and Barbados.

[PJ Vogt]

Okay, so in the pre podcast era, I'm a colonial merchant from Pennsylvania selling hogs down the Delaware River. And I would have thought, like you, mainly, I'm passionate about hogs, but I need to understand the financial system I'm transacting in podcasts don't yet exist. And so the avenue for my curiosity is that as an adult, I would have bought a financial textbook, and then what would I have found in this financial textbook? What would I have been learning?

[Brendan Greeley]

These textbooks drew a distinction between real money and imaginary money. And so from our perspective now, that sounds like imaginary money is a judgment, like it's monopoly money. It doesn't matter. But they took it very seriously. Both kinds of money were equally valuable, but they had different purposes. So real money was a coin. Imaginary money was some kind of a contract. And there were two major kinds of contracts. One was what we call negotiable paper.

[PJ Vogt]

Negotiable paper.

[Brendan Greeley]

It's just an iou. We call it a promissory note. It's a piece of paper, and it's roughly the size of a dollar bill today. I think it holds the same function. And you just write down, you know, I will pay you back on this day the following amount.

[PJ Vogt]

And were these promissory notes? They're pre. Paper money. They're being written.

[Brendan Greeley]

Be very careful about what you say about paper money. They are paper money. Oh, but they're paper money written by private citizens.

[PJ Vogt]

Okay. But they're pre. Like the green US Dollar that is in my pocket. Like the promissory notes predate that. Yes.

[Brendan Greeley]

Yeah. The promissory note was just a piece of paper that had a promise written on it. You and I don't know each other. I don't know that I could write you a promissory note, but I know your executive producer, Sruti, very well. So if I owed Strute Money. I would write her a promissory note, but Strutti could sign it over to you in the way that we used to sign over checks, and she would assign it to you. And now I owe you money. You've got to come back to me. That's my note that you've got to collect on from me.

[PJ Vogt]

So these promissory notes, they're not literal dollar bills. The government's not printing them. But Brennan says they're serving the same function. Promissory notes are money. They're as much money as the cash you get from an ATM today. And back then, debt and credit were tracked another way that also feels like a primitive version of something we'd recognize, the same way we lend our friends money or pay them back. With Venmo and PayPal, businesses in the colonies kept these physical books, big public ledgers that tracked credits and debts.

[Brendan Greeley]

It's easier to think about on a bar. So I've looked at colonial bar ledgers because they're so much fun, because they tell a real story.

[PJ Vogt]

And what's a bar? You mean, like, literally, like, the money that had been spent and owed at a drinking tavern? Like bar? Like bar?

[Brendan Greeley]

Absolutely.

[PJ Vogt]

Got it.

[Brendan Greeley]

And so there was a big bound ledger. It was about, you know, sort of foot and a half by two feet. It was a big thing. And my theory is they would actually haul it out on the bar and, like, call out the debts so that everybody understood what was happening, because debt is also the social thing that everybody's got to understand and agree with, because there are all sorts of stains on the covers of these books. They're a mess. I think that, like, people were spilling drinks on them and stuff, but nobody ever paid cash. So there are some coins coming in. Again, there's trade with the Caribbean. That trade tends to bring silver, Spanish mill dollars into the economy, but there's just not enough of them to base the entire money economy on them. So America had this tradition very early on, before anything that we think of, like, our current bank bills, of people understanding that you could sign a piece of paper and move it around the economy and it had value and you could buy things with it. People have to get used to this idea. It takes a long time.

[PJ Vogt]

It's a weird thing, but it's funny. It's like what I hear you saying, which is, like, the history of money. There's different stories of how we got here. And the one that I've gotten from really pop economic journalism that you are not as friendly with is money starts out and it's very physical and it's like metal and coins. And at some point we become more comfortable with the way things look today, which is that money is much more an idea. And that idea is kept as like, you know, like most of the money to my name is not dollar bills in the bank. It's like numbers on a ledger kept by my bank. And what you're saying is. No, no, no. Even at the very beginning of American history, money was much more about promises made, promises kept, debt as a thing written down, and the idea of a pocket full of coins was more the exception than the rule. The same way most of our money is like, unquote imaginary. Now. Much of our money was, quote, unquote imaginary.

[Brendan Greeley]

Then, yeah, congratulations, you just wrote the introduction to my book.

[PJ Vogt]

Brendan didn't pay me to do that. He's now in debt to me. According to Brendan, in colonial America, debt itself was not inherently viewed as bad. There's a Shakespeare line, neither a borrower nor a lender be. But in our country, when there wasn't enough currency to go around, everyone had to be both. We ran on a system of IOUs that worked pretty well. Your promissory note was valuable because I trusted you to pay it, and you paid it because if you didn't, your future IOUs would no longer be honored. But that ad hoc system begins to evolve. Chapter two, the Birth of the American Bond. So back in colonial times, the colonists themselves are writing these promissory notes, trading IOUs. Money is being created out of thin air by just anybody. That changes. States start issuing promissory notes because states want to borrow money too sometimes. And then during the Revolutionary War, the government suddenly needs a lot of money, so it prints it. The Continental Congress printed paper currency, basically IOUs. These IOUs were as valuable as your faith that the country would win the war and be able to pay those IOUs back. America did win. And the idea of the government printing money stuck around. The new federal government would now create money by creating debt, creating IOUs the government promised to pay back later, after the war. Alexander Hamilton took that idea and scaled it. He consolidated all the war debt, federal and state, into a national debt. He did this while wrapping the new federal government issued bonds, American IOUs that anyone could buy. And because the government guaranteed bonds would be repaid with interest, a market formed for these bonds, a market that still exists today. Americans buying the bonds were helping to fund their own new country. In the beginning, these U.S. government bonds were held by citizens. They were also held by banks.

[Brendan Greeley]

And so, increasingly, over the course of the 19th century, you see federal debt becoming a bigger and bigger part of the banking system and a bigger and bigger part of the bank notes that we traded around.

[PJ Vogt]

We're going to fast forward a bunch here. Fast forward the Civil War, bank failures, federal deposit insurance, the invention of the Fed. Because I think all you need to know this week is that American federal debt will, over time become not only the way that the US government will start to pay for stuff, those IOUs will become so reliable, so valuable, that the rest of the world starts to use American IOUs like money in the sense that investors can trade bonds or they can hold onto them, knowing that a US Bond's value is stable, it won't swing in wild ways. And that's sort of what our modern system looks like today. When the federal government wants to borrow money, wants to sell debt, investors line up to buy it in the form of government bonds, treasuries, US government IOUs, which other investors treat like money. And other investors love using these IOUs and always have. Because what makes them so unique is that for a century, the United States has mostly seemed like an immensely safe bet relative to most other places you might park your cash. We will get to what it means this month. Now that that has begun to change. Right now, we're still in the history chapter three. Things begin to get out of hand. One thing I was very surprised to learn this week is that in America, for many decades, even though the government could take on lots of debt for cheap borrow on metaphorical credit card after metaphorical credit card, we were actually, for a very long time, shockingly responsible about all this. For years, no matter who was in.

[Brendan Greeley]

Power, until very recently, until like, late 70s, early 80s, every new debt issue had to be approved for a reason. Okay, the treasury went to Congress and said, we're gonna fight a war or we're gonna build things, or usually it was fighting a war.

[PJ Vogt]

Yeah.

[Brendan Greeley]

And Congress said, yep, we agree that is important. You may borrow money to do that. So there wasn't a regular liquid massive market of Treasuries the way there is today until very recently.

[PJ Vogt]

So before the 1970s, what you're saying is like, assuming that I was a person who thought a lot about the national debt, like in 1932 or 1951 or 1965, it would have been more possible to say, like, this year, the national debt is X. And, like, going through the government's, like, credit card bill and kind of see where we spend it. What happens after the 1970s, that changes that.

[Brendan Greeley]

In the early 80s, there's a paper called some unpleasant monetarist arithmetic, which basically said we're not seeing necessarily the rise in risk premiums for American debt. So it may be that, and this is an important asterisk, so long as the debt is buying something productive, that you can issue much more of it than we thought.

[PJ Vogt]

Brennan's interpretation, looking back, is that over time, America's view of its own national debt slowly shifted. The new logic went, maybe we could actually borrow more, like way more than we used to, and maybe paying it back matters less than we thought. So long as the world believed that we were spending money in a way that would make even more money be productive, then why wouldn't everyone keep lending money to us at a low interest rate? And it kept working.

[Brendan Greeley]

People just bought American debt because it's a safe asset. And it turns out that as people were becoming wealthy all over the world, in particular oil producing countries, eventually China as well, you know, if you don't plan on spending that wealth domestically, you gotta do something with it. Like it has to be in some form. And so the form it took was very often Treasuries. So there turned out to be this seemingly inexhaustible demand for Treasuries as a safe asset all over the world. So it turns out that one way of thinking of us right now is that we're the Saudi Arabia of money.

[PJ Vogt]

Meaning what? Like, they make all the oil, we make all the money?

[Brendan Greeley]

Yeah. To the rest of the world, Treasuries are money, or at least until very recently. And so we have the luxury of producing as many of them as we care to. We just sort of kept on spending. We sort of quietly began selling more Treasuries and then more Treasuries and then more Treasuries and then more Treasuries.

[PJ Vogt]

So if you think of it as from sometime in the 80s until around now, while obviously there's exceptions and there's interruptions and we go through a recession for the most part, America was a flush person who, like Amex and Visa and Chase in the form of like Japan and China and lots of other countries. And like American banks are all just like, please, please, please, we want to sell you credit, we want to take your debt. What are we spending on all this money on, like, what did we buy?

[Brendan Greeley]

Yeah, I think that's the most important question. So, you know, we could have decided we have this unbelievable ability to sell safe assets to the world. We're going to make sure that we have an incredibly well capitalized hospital system with endowments for every hospital. Or we're going to, you know, run cable and then eventually broadband to every house in America. We're going to pay for electrical transmission lines so we can move energy across the country. We could have decided to pay for assets that are productive, that actually generate new income, and therefore guarantee that we're going to be able to collect new taxes in the future.

[PJ Vogt]

What did we do instead?

[Brendan Greeley]

We paid for wars and tax cuts and to mop up the consequences after bank failures.

[PJ Vogt]

I should acknowledge that the largest structural drivers of our debt for years have actually been Social Security, Medicare, Medicaid. But the wars and tax cuts and bailouts Brendan's talking about, they were big spikes that we never paid down. Just looking now at a chart of our debt, watching from the 2010s to now, the trillions accumulate, I feel a wooziness, the feeling of seeing a binge captured in raw numbers what a credit card company might look at right before they cut somebody off. But nobody did cut us off. And now, after a short break, we get to the heart of the question that brought us here. Who exactly do we owe that money to? And what happens if our leaders or really Donald Trump decides we're just not going to pay the bill? That's after some ads. This episode is brought to you in part by bilt. Attention renters. If you've not heard of bilt, you're missing out. Out Earn rewards through bilt. Just by paying your rent on time, there's no cost to join. And just by paying rent, you unlock flexible points that can be transferred to your favorite hotels and airlines, a future rent payment, your next Lyft ride, and more. When you pay rent through bilt, you unlock two powerful benefits. First, you earn one of the industry's most valuable points on rent every month. No matter where you live or who your landlord is, your rent now works for you. Second, you gain access to exclusive neighborhood benefits in your city. Bilt's neighborhood benefits are things like extra points on dining out, complimentary post workout shakes, free mats or towels at your favorite fitness studios, and unique experiences that only BILT members can access. And when you're ready to travel, BILT points can be converted to your favorite miles and hotel points around the world, meaning your rent can literally take you places. So if you're not earning points on rent, the question is, what are you waiting for? Start paying rent through BILT and take advantage of your neighborhood benefits by going to joinbilt.com search that's J-O-I-N-B-I-L-T.com search make sure to use our URL so they know we sent you. Join bilt.comsearch to sign up for Built Today.

[Noah Smith]

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[PJ Vogt]

Welcome back to the show. Chapter 4, April 2025 we were here this week because listener Ronald Young Jr. Had wanted to know two things, really. One, should he think about personal debt as different from federal debt? I had an answer to the first. Debt is pretty much debt. Federal debt is made up of bonds, treasuries. Treasuries are just debt the US Government sells. And like US individuals, the government relies on debt on loans to fund its future. Debt on its own, basically neutral. But the federal debt. Ronald had also wanted to know who the government owed it to and whether there was like an international version of a collections agency that might show up if one day we didn't pay it. So I did what you do when you still have questions. I called an additional expert on the economy.

[Unnamed Advertiser]

Hello.

[PJ Vogt]

Hi Noah. How are you?

[Unnamed Advertiser]

Not bad. Do you mind if I eat this bagel?

[PJ Vogt]

No, go for it. While you're noshing, I'm gonna ask you some questions about debt and national debt. And that's it.

[Unnamed Advertiser]

Yeah. All right, let's do it.

[PJ Vogt]

Noah Smith. He writes a substack I read called no Opinion. N O A H P I N I O N. He writes a lot about federal spending federal debt. But I wanted to start with the brass Tax. So how much is our national debt right now?

[Unnamed Advertiser]

I don't know. Let me look that up. Hold on. Yeah, there is a debt clock that sort of keeps track of this. It has to make some estimates, you know, because he doesn't know exactly the number. And the U.S. national debt, it's about $36 trillion.

[PJ Vogt]

Are you on usdebtclock.org?

[Unnamed Advertiser]

No, I'm on the Joint Economic Committee of the Senate.

[PJ Vogt]

Okay. Because the site I'm on looks like it's gonna steal my credit card. Yours sounds better.

[Unnamed Advertiser]

Yeah.

[PJ Vogt]

Okay, so wait, you said it's how much?

[Unnamed Advertiser]

$36 trillion. That's $36 million million dollars.

[PJ Vogt]

How am I supposed to feel about that number?

[Unnamed Advertiser]

I don't know.

[PJ Vogt]

How do you feel about that number?

[Unnamed Advertiser]

I think that this number is a lot. So one way of looking at it is you could compare it to income. So the annual income of the United States economy is about $30 trillion.

[PJ Vogt]

Noah did some napkin math for me. Our national debt is 1.2 times our GDP. That $30 trillion figure, meaning our debt is 1.2 times all the money made in America this year by companies, by people, you, me, the money search engine makes when you subscribe to our podcast's premium feed, Incognito Mode. That is a tiny little piece of gdp. Another way Noah said you could think about this is just in terms of tax revenue. That's the main way our federal government raises money for itself. And the national debt is equivalent to seven years of our tax revenue. As spoke the poet Borat Wa wa. What would happen if, in a large way, we started not being able to make those payments?

[Unnamed Advertiser]

So a sovereign default would be an economically catastrophic event for a number of reasons. The main reason is that the entire financial system holds a bunch of treasury bonds as if these are risk free assets. In other words, they believe so strongly that the government will pay them back that they've based a lot of their financial models around this assumption. So if you have a sovereign default, what happens is that every bank in America will become insolvent overnight. And many of the banks around the world will also become insolvent overnight. What an insolvent bank means is it means that its liabilities exceed its assets. The amount of money it owes exceeds the amount of money that it has able to pay back. When you have an insolvent bank, it's completely vulnerable to a run on the bank. People pulling out their money and trying to put in cash, which people immediately will. Because if you have an insolvent bank, you want to get your money out before other people do. So what happens is that the banks in the United States collapse. And if the banks in the United States collapse. So we had a near collapse in 2008. And you remember the economic devastation that resulted from that, right?

[PJ Vogt]

Yes, right.

[Unnamed Advertiser]

So we have that.

[PJ Vogt]

But worse, I should say here, the place Noah's scared we could go. We've never been there before, so everything he's saying is his best guess. It could go differently. Maybe some banks would survive, maybe the Fed would step in and prevent some damage. But he's certainly directionally right. Like, we are talking about living in a house on fire. The best version of which would be worse than anything that's happened to the American economy in our lifetime.

[Unnamed Advertiser]

So 2008. But worse, bank lending to companies stops. Companies stop investing. They lay off massive amounts of workers. Unemployment goes really high, let's say 20% or more. And our GDP, our national output goes down, by rough guess, 20%. So we get 20% poorer. Massive unemployment, economic devastation, huge numbers of businesses fail. It's just. It's terrible.

[PJ Vogt]

Okay, here's like a meta question for you, all right? Like, when I was a kid, sometimes I would get worried about really hypothetical things that didn't actually matter. Like, what if I forgot to remember how to breathe? Or what if the things I'm saying, other people are hearing other things than the things they're saying? Like, I'm hearing other things. As somebody who thinks about the health of the economy and cares about risk to it, does asking about the national debt feel like a besides the point? Who cares? We're not gonna stop breathing question. Like, where does it actually. No, it feels like a real question.

[Unnamed Advertiser]

It's a big. Yeah, it's. And it's starting to become very worrying.

[PJ Vogt]

There's two reasons Noah's worried. There's the size of the debt, which we've talked about. But there's something else. The interest rate. We're constantly paying off our old bonds by issuing new ones. We borrow to pay off our loans. Economic historian Brendan Greeley, he'd explained that part of the reason America started borrowing more was that interest rates stayed so low that it was almost like the loans were free. But Noah says that that was a dangerous thing for people to get used to.

[Unnamed Advertiser]

The people who said that debt was safe in the 2010s may have taken that too far. So if our government needs to borrow to do stuff, it's good to borrow when interest rates are low? Yes, but at some point, you should pay it back. Because interest rates won't stay low forever.

[PJ Vogt]

And we did not.

[Unnamed Advertiser]

We did not. And so the thing we borrowed to do in the 2000 and tens was to help get ourselves through the Great Recession without unemployment going higher. It was a lot. It was a lot. It didn't quite double our debt, but it almost did.

[PJ Vogt]

Yeah.

[Unnamed Advertiser]

And so we borrowed that, and we should have started paying it back as soon as the economy improved, but we didn't. Instead, we did things like tax cuts and increased spending. We didn't start paying down.

[PJ Vogt]

So Noah's answer harmonizes with Brendan's. They both tell a story about a country whose debt became, in a way, too valuable, or a country that grew too reliant on borrowing. But Noah adds an additional wrinkle, which explains why the present moment specifically is so scary. The interest rate on our debt, it doesn't just go up at random. It reflects a lot of things. A big one is, does the rest of the world trust us to pay them back? Everything Trump has done to freak Wall street out, to make you not want to look at your 401k or your stocks or your crypto account or whatever, the rest of the world feels the same way. This $36 trillion, we owe a lot of, that is to American institutions, banks, pension funds, even citizens. But about 30% of our publicly held debt is owned by other countries.

[Unnamed Advertiser]

Japan owns the most. So Japan owns about a trillion dollars of our debt. China is number two. UK is number three. Luxembourg is after that. That's just the EU owning our debt. Cayman Islands, that's, like, fake. That's like a bunch of financial engineering bullshit. Then Canada, Belgium, Ireland, France, Switzerland, Taiwan. So. So Europe and Asia are the main ones.

[PJ Vogt]

And these are. Many of these countries are places that we are picking a fight with right now.

[Unnamed Advertiser]

All of them. We picked a fight with all of them at the same time.

[PJ Vogt]

So if they. Is there a world where they, like, hate cell just to screw us over?

[Unnamed Advertiser]

Yeah, well, I mean, I don't know. It's hard to differentiate empirically between hate and fear. So their hatred of what we're doing and their fear that we won't pay them back is not necessarily. I can't tell you how much of one and how much of the other. Okay, yeah, no one can. But yes, yes, absolutely. And you could argue that China's now doing this. China absolutely can do this to just spite us. China can be like, fuck you. We don't need you. You put tariffs on us. Suck it.

[PJ Vogt]

Economically speaking, it turns out there's more than one Way for China to say suck it. Yeah, there's all the tariffs China announced on American goods, but also someone or lots of someones just sold a ton of American bonds. There's a huge sell off in the bond market. What on earth is going on here?

[Unnamed Advertiser]

There was a significant sell off, an ominous drop in US risk assets alongside the dollar.

[PJ Vogt]

Treasury.

[Brendan Greeley]

Treasury that peaked overnight.

[PJ Vogt]

US government debt. Well, no one really knows what then because it's never happened and no one wants to find. Noah suspects that the sell off could have been another way China said suck it, although we don't yet have the data to know for sure.

[Unnamed Advertiser]

So someone out there knows, but then it's hard to tell who sells it until later they report how much they have. And so we don't know if they were the ones selling the other day. They probably they were. Some of it. It's hard to know how much exactly was them. But yes, I think they did that the other day. I think that when Trump announced like 125% tariffs on China or whatever, I think China's like, well, screw you and started selling some of our bonds.

[PJ Vogt]

Do we own some of their bonds?

[Unnamed Advertiser]

Mostly? No, we don't.

[PJ Vogt]

Feels like that was an oversight. Times are grim in America right now. The future is uncertain, but at least I, a person who found out what a sell off in the bond market is 10 minutes ago can make Noah Smith, an economist, forced to explain that concept to me, occasionally laugh. Anyways, the people who did not vote for Donald Trump were worried about all sorts of things that might happen if he won. Despite those worries, I didn't see anyone predict this. One of America's great natural resources, I now know, was that other countries, even the ones who didn't love us, believed in our future so much that they treated our IOUs like they were a steady form of international currency. They gave us, functionally, an endless line of low interest credit, and Trump has damaged that. His strategy, if it's a strategy and not a personality, is to act crazy and pick fights. So now fewer people want to buy our debt, which means the interest we pay on our debt rises. And as our debt gets more expensive to hold, a dark possibility appears, a remote one, but still, what if we were to default? What if America missed its payments at this point? Are there reasonable people who really consider the prospect of America actually defaulting on debt to be a real one? Or are we still kind of convicted? I do. You do?

[Unnamed Advertiser]

I do. I do. I think there's a real possibility that we will default on debt.

[PJ Vogt]

And why do you think that?

[Unnamed Advertiser]

Because I think when you look at how Trump does business in his personal business dealings, it's consistent with his personal pattern. So Trump, when his businesses were in trouble, be it a casino, a property development, commercial building, he would always do two things, right? He would look for a bailout. He would look for someone to give him a bunch of money, an infusion of cash, okay, to keep him going, or he would declare bankruptcy. And Trump has declared bankruptcy many times. It is Trump's instinct to say, oh, I don't have to pay you back that debt. Well, I'm just not going to. That is his instinct in business. And now that he's running the federal government like he runs one of his businesses, Art of the Deal, I think the first thing he'll do is look for the Federal Reserve to bail him out and print money to reduce treasury yields. I think that's the first thing he'll do. And then if that doesn't work, or if it causes really high inflation and everybody's mad about it, or if that doesn't go right, then I think that the next thing he'll do is look around for a way to default on the US Debt. So I don't know that that means we will default. I still think it's less likely than 50% that the United States will default, obviously, But I see it reasonably likely that Trump talks about default and starts publicly floating this as an option. And I think that at that point people start getting scared and yields will go up more. And there's a chance that this could become a runaway self fulfilling prophecy where Trump talking about default scares people so much that they all take their money out of US Bonds and then we have to default.

[PJ Vogt]

Have you ever felt this way as someone who tries to understand the economy before?

[Unnamed Advertiser]

Never, not even close. I've never seen someone intentionally smash the American economy like this. It's never happened.

[PJ Vogt]

So Noah Smith, not a panicky writer by disposition, is looking at the horizon with some concern. Brendan Greeley, the person who told me the history of debt in this country, he too is worried about our future. And so what are you doing? Like, how do you think about, just like, as a human being living in a country that might be facing something really perilous, like, are you stockpiling gold and shotguns and promissory notes? Like, what do you do?

[Brendan Greeley]

The situation in which treasuries are called into question is so catastrophic that I don't know that there is a hedge against it. I sort of, I always get angry at Very wealthy people who buy places in New Zealand or Canada where they can live off the land as a Plan B, because sort of my Plan B is continuing to fight for a functioning democracy that makes good choices because we don't really have any other options. Yeah. So I think important people in America who have Trump's ear pay attention to the price of Treasuries, pay attention to yields, the sort of imputed interest that America has to pay on Treasuries. And so I think it is far more likely that people will say, look, you cannot call Treasuries into question. We'll give you all sorts of latitude to do all sorts of horrific things, but that one you don't get to mess with. But if we go back to your initial question about does America just have a credit card like normal people? I think it does. Not. Everybody who studies this agrees with that. So I want to make sure that this is not a statement of fact, but it is an interpretation that I agree with. And I think that in our own lives, this makes sense. Because when you have a friend who's in debt, you don't just care about the amount of debt. You care about what did they buy with it. So if they bought a trip to Ibiza and a Jet Ski, like, you're probably worried about your friend, but if they took out a small business loan to start a bakery, and they're at the bakery every morning at 3, putting the dough in the oven, you're probably not worried about them. They're doing something productive with that loan. Ibiza and Jet Skis is not productive. And so eventually, if you can continue to create productive assets, help encourage the economy to expand in a way that will continue to bring in taxes, you could roll over this system indefinitely. It is a big country full of smart, inventive people who want to do new things that will bring in taxes. I do worry, and I'm a little sad that a lot of what we spent on when we had, for a time an unlimited ability to borrow, we spent it on the government version of Ibiza and Jet Skis. And we're looking back at that. And you ask, what do we do from now? How do we fix this? PJ I don't think we can. In the same way that if you have a friend who goes bankrupt, they just sort of. They have to live quietly and deliberately for a while. And I think that all those hard choices that we've been avoiding, the most likely outcome, if for some reason the Treasuries were called into question, we'd have to have those conversations about things we've been avoiding.

[PJ Vogt]

So the answer, it turns out to the question of when we should start worrying about the national debt or the interest rate on our treasuries. Unfortunately, maybe sometime in the past. But as things change, it's good to know whether America still looks like a country that pays people back. And if you want to know that There's a number 10 year treasury yields as I write this Thursday night are at 4.3% lower than during the sell off, higher than last November. A new number to check on my phone when I feel worried. Just what I was looking for. Brendan, thank you. So fun to think about this stuff.

[Brendan Greeley]

Is it fun?

[PJ Vogt]

You know, it is perversely fun. I mean, it's not fun. It's like a very scary feeling. But like, I don't know, I just feel like it's always better to try to understand than not.

[Brendan Greeley]

Yeah, I think so. I think theory is catching up to reality and reality is going to be painful.

[PJ Vogt]

Well, thank you for talking to me about this.

[Brendan Greeley]

Yeah.

[PJ Vogt]

Brennan Greeley. He's working on a book about the history of the dollar and you can find Noah Smith online at his substack no Opinion.

[Brendan Greeley]

SA.

[PJ Vogt]

Search Engine is a presentation of Odyssey and Jigsaw Productions. It was created by me, PJ Vogt and Shruti Pinamani. Our senior producer is Garrett Graham. This episode was fact checked by Mary Mathis. Theme, original composition and mixing by Armin Bazarian. Additional production support on this episode by Kim Kubel and Shawn Merchant. Special thanks this week to Alex Bloomberg. If you'd like to support our show, we could use it and get ad free episodes, zero reruns and the occasional bonus audio. Please consider signing up for Incognito Mode. You can learn more at Search Engine Show. Our Incognito Mode listeners recently got a big, big discount on our merch, which will be arriving in the next couple of weeks. Also, if you have time, you can rate and review us on Apple Podcasts. Because of the wonders of the algorithm, it helps people find the show. It's not the system I design, it's the system I live in. And we read the reviews and learn from them. Our executive producer is Leah Rees Dennis. Thanks to the team at Jigsaw, Alex Gibney, Rich Perello and John Schmidt. And to the team at audience, Rob Mirandi, Craig Cox, Eric Donnelly, Colin Gaynor, Nora Curran, Josephina Francis, Kurt Courtney and Hillary Scheff. Our agent is Oren Rosenbaum at uta. You can follow and listen to search engine for free on the Odyssey app or wherever you get your podcasts. Thanks for listening. We'll see you in two weeks.