Hey there,
Welcome
to another week of financial wisdom with your guide, CoachMO! Where
we’re tackling National Debt, a topic that sounds complex but is key to
understanding how countries manage money. I’ll keep my explanations very
simple and using the U.S. as an example. We’ll cover what national debt
means, how it happens, which countries owe, and what it means for you.
Plus, I’ll share global debt stats and an actionable takeaway to keep
your financial journey on track. Let’s get started!
What is National Debt?,
National
debt is like a country’s credit card bill. It’s the total amount a
government owes because it spent more than it earned (from taxes, for
example). When spending exceeds income, governments borrow money, and
that borrowing adds up to the national debt.
For
the U.S., the national debt hit $36.1 trillion in December 2024. That’s
a massive number, and it’s grown over time because the government funds
things like schools, roads, the military, and emergencies (like
pandemics), but doesn’t always collect enough taxes to cover it all.
How Does a Country Like the U.S. Get into Debt?
Think
of it like borrowing to buy a house, where you take a loan and promise
to pay it back with interest (extra money for borrowing). The U.S.
borrows by selling Treasury securities (bonds, bills, or notes), which
are like IOUs promising repayment with interest.
Here’s how the U.S. debt builds:
· Budget Deficits:
When spending exceeds tax revenue, the government borrows to fill the
gap. In 2024, the U.S. deficit was about 8.1% of GDP, meaning it spent
way more than it earned.
· Big Events: Wars, recessions, or pandemics spike spending. For example, COVID-19 relief in 2020 pushed the U.S. debt-to-GDP ratio to 133%.
· Interest Costs:
Borrowing isn’t free. In 2024, the U.S. paid $892 billion in interest
on its debt, and this is projected to hit $1.7 trillion by 2034.
These
deficits, plus interest, keep growing the debt. The U.S. has had debt
since the Revolutionary War, when it borrowed $75 million to fight for
independence.
Who Does the U.S. Owe Money To? Who Buys the Debt?
The U.S. borrows from a mix of lenders who buy its Treasury securities:
· Domestic Investors (Public): About
77% of U.S. debt ($24.5 trillion) is “held by the public,” including
U.S. citizens, banks, companies, and pension funds. These are seen as
safe investments.
· Foreign Countries: Roughly 22.9% ($7.9 trillion) is owned by other nations. As of November 2024, the top five holders are:
· Japan: $1.1 trillion
· China: $749 billion
· United Kingdom: $690.2 billion
· Luxembourg: $373.5 billion
· Canada: $328.7 billion
· The Government Itself: About 23% is “intragovernmental,” where the government owes itself (e.g., Social Security Trust Fund lends to other programs).
Investors buy U.S. debt because it’s considered one of the safest bets historically; the U.S. always pays its debts.
Do Countries Have to Repay Their Debt? What Happens If They Don’t?
Unlike
personal loans, countries don’t always pay off their entire debt. They
often refinance by borrowing new money to pay old debts, like using one
credit card to pay another. The U.S. does this regularly. As long as
lenders trust the country to pay interest, it can keep borrowing.
But missing interest payments (called a default) is serious:
· Higher Costs: Lenders lose trust and charge higher interest rates, making borrowing pricier.
· Economic Trouble: A default can crash the currency, spike inflation, and hurt jobs and businesses.
· Global Ripple: A U.S. default could trigger a worldwide financial crisis since many rely on U.S. debt.
The
U.S. has never defaulted in modern history, partly because it can print
dollars to cover payments (though this risks inflation).
What Is Debt-to-GDP, and Why Does It Matter?
The
debt-to-GDP ratio is like a financial health check. It compares a
country’s debt to its Gross Domestic Product (GDP), the total value of
goods and services produced in a year.
· Example: In December 2024, U.S. debt was $36.1 trillion, and GDP was about $28.5 trillion, so the ratio was (36.1 ÷ 28.5) × 100 = 124%.
What Does a High or Low Debt-to-GDP Ratio Mean?
· High Debt-to-GDP (e.g above 77%)
· Meaning:
The country owes more than it produces, which can make repayment
harder. Ratios above 77% can slow economic growth by 0.017% per year.
· Impact on Citizens
· Slower Growth: High debt means less money for schools or roads, slowing job creation.
· Higher Taxes: Governments may raise taxes to pay interest, reducing your take-home pay.
· Inflation: Printing money to pay debt can make groceries and gas pricier.
· Example: Japan’s ratio is 235% (2024), but it’s manageable since most debt is domestic, and Japan’s economy is stable.
Low Debt-to-GDP (e.g below 60%)
· Meaning: The country owes less than it produces, making debt easier to handle.
· More Investment: Governments can fund education or infrastructure, boosting jobs.
· Lower Taxes: Less pressure to raise taxes.
· Example: Saudi Arabia’s ratio is 14.1%, one of the lowest, giving it financial flexibility.
How Many Countries Defaulted in the Last 10 Years?
From 2015 to 2024, at least 12 countries faced debt defaults or severe distress, mostly developing nations:
· Venezuela (2017): Defaulted due to economic collapse.
· Lebanon (2020): Defaulted amid political and economic crises.
· Zambia (2020): Struggled with Chinese loans and falling commodity prices.
Defaults often lead to poverty spikes, currency crashes, and tough lender negotiations (e.g with the IMF).
Have the U.S., UK, China, or EU Ever Defaulted?
· United States: No modern default. The U.S. faced debt ceiling scares (e.g., 2011, 2013) but always paid on time.
·
United Kingdom: No modern defaults. A 1672 event (“Great Stop of the
Exchequer”) paused payments, but the UK has been reliable since the Bank
of England’s founding in 1694.
· China: No sovereign default. China’s debt is mostly domestic, and its massive economy helps it manage payments.
· European Union: The EU doesn’t borrow like a country, but Greece defaulted in 2015, missing IMF payments, before a bailout.
What’s the State of Global National Debt?
Global
public debt reached $102 trillion in 2024, up from $91 trillion in
2022, growing faster than global GDP. Developing countries owe about $29
trillion, with China, India, and Brazil driving much of the increase.
Here are the debt-to-GDP ratios for 2024:
Top 10 Countries (Highest Debt-to-GDP)
· Sudan: 252%
· Japan: 235%
· Lebanon: ~350%
· Eritrea: 210%
· Singapore: 175%
· Greece: 177.4%
· Italy: 137%
· United States: 124%
· France: 116.3%
· Canada: 114%
· Bottom 10 Countries (Lowest Debt-to-GDP):
· Brunei: 2%
· Kuwait: 3%
· Timor-Leste: 5%
· Afghanistan: 7%
· Democratic Republic of Congo: 12%
· Botswana: 13%
· Saudi Arabia: 14.1%
· Estonia: 14%
· Russia: 18.89%
· United Arab Emirates: 20%
CoachMO’s Take on National Debt
Debt
isn’t always bad; it’s like borrowing to start a business. If a country
uses debt for smart investments (like infrastructure), it can grow the
economy and create jobs. But when debt balloons like the U.S.’s $36.1
trillion or Sudan’s 252% debt-to-GDP, then it’s a warning. High debt can
lead to higher taxes, less public spending, or inflation, hitting your
wallet. Globally, $102 trillion in debt is a red flag, especially for
developing countries spending more on interest than on health or
education.
The
U.S.’s 124% debt-to-GDP ratio is high but manageable for now because
the dollar is trusted worldwide. Still, those $892 billion interest
payments in 2024 are a wake-up call, with less money for schools or
roads means slower growth for everyone.
You
can’t control national debt, but you can control your finances.
Understanding debt helps you see why prices rise or taxes change, so you
can plan smarter.
Actionable Takeaway for Money Movers
Monitor Your Debt-to-Income (DTI) Ratio: Countries use debt-to-GDP to gauge financial health; you can use DTI to check yours.
· Calculate It: Add your monthly debt payments (e.g., loans, credit cards). Divide by monthly income. Multiply by 100.
· Example: $600 debt payments ÷ $3,000 income = 0.2 × 100 = 20% DTI.
· Goal: Keep DTI below 36%. Lower is better, like a low debt-to-GDP. High DTI means you’re at risk if bills pile up.
· Action:
If DTI is high, prioritise high-interest debt (e.g., credit cards). Try
the “avalanche method” (pay the highest-interest debt first) to save
money.
That’s
a wrap for this week, Money Mavers! Managing your debt keeps you
financially free, no matter what’s happening with global or national
debt.
Got questions? I’ll be glad to explain further, I’m here to help you make sense of your money.
Follow me on all social media platforms for more Financial Insight and be the first to listen to our weekly podcast on Spotify https://linktr.ee/info.coachmo.
Until next time,
CoachMO
Your Financial Literacy Plug
