We are stretching our nation’s finances and creditworthiness so thin that we may find ourselves unable to afford to defend our vital interests
Biden: Trump had the largest national debt
President Biden details how he would respond to the national debt during the CNN Presidential Debate. (Courtesy: CNN)
The federal government is now paying interest on the national debt at an annualized rate of more than $1 trillion per year, expanding to $1.5 trillion in 2025, according to the latest figures from the Treasury and the Bureau of Economic Analysis. Annual interest expenses have more than doubled since the third quarter of 2020, shortly before President Biden took office and they are fast becoming a pressing national-security problem, even as conflicts escalate and proliferate around the world.
From Ukraine to Gaza, from the Red Sea to the Taiwan Straits, from West Africa to the Philippines, America and its allies face threats on a scale and geographic scope we haven’t confronted since at least the end of the Cold War. We are stretching our nation’s finances and creditworthiness so thin that we may find ourselves unable to afford to defend our interests around the world. And President Biden’s latest 10-year budget seeks to rein in deficits by cutting defense spending by 21%, which can only embolden America’s rivals and adversaries.
If you already have the pedal to metal on spending and debt, you leave yourself no room to surge spending in case one or more of the current or simmering conflicts explodes, expands or metastasizes.
Our escalating debt crisis hurts national security in three key ways: It diminishes our financial "surge capacity," it robs our private sector of capital for productive investment, and it imperils America’s pre-eminent role in international financial markets.
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In all of our modern wars, America has had virtually limitless economic resources from which to build and rebuild its military strength. That is not only because of our immense national resources, but also because of our ability to issue public debt to finance that production. As Cicero said, "The sinews of war are infinite money."
If you already have the pedal to metal on spending and debt, you leave yourself no room to surge spending in case one or more of the current or simmering conflicts explodes, expands or metastasizes.
The return of conventional high-intensity war in Europe has reordered how America should think about readiness. It is clear today that this type of conflict consumes a far higher volume of resources, particularly ammunition and unmanned aerial systems, than any of America’s recent wars. The fact that the United States burned through its entire existing quantity of 155mm rounds and much of its precision munitions supporting Ukraine does not bode well for a conflict over Taiwan, let alone Ukraine plus Taiwan plus Gaza. Should these conflicts expand, the U.S. will have to rearm in a hurry, financed by debt.
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Second, our ability to maintain our defense industrial base under the weight of this national debt is declining. Private borrowing for investment is being crowded out by the Treasury's flood of debt issuance. The driver of long-run economic growth, real private fixed investment, has increased less than 0.6% over the past seven quarters. And these investments are slowing even as U.S. military needs are growing.
The collapse in deterrence since President Biden took office and changes in the way wars are fought have vastly increased our need for materiel. An industrial base is needed to produce modern munitions and arms, and there is not enough private investment to be found. The artificial intelligence, quantum-computing and space-based weapons systems for the conflicts of tomorrow must be designed now. Having the wherewithal to finance current bullets along with future bytes is imperative.
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Third, the fact that there are still customers for this debt and for the dollar has ancillary benefits for our sanctions power. America's ability to levy effective sanctions creates deterrence, saving us money by avoiding conflict, and it is the dollar’s preeminent status that makes American sanctions effective. But that will only last so long as the dollar and our debt are attractive.
History teaches us that reserve currency status is conferred not just by economic magnitude, but military might. Portugal, Spain, Holland, France and Great Britain, burdened by debt, all experienced the sequencing of financial stress, armed services denigration and loss of reserve currency status. The Biden administration is propelling the U.S. toward this fate.
The current administration's willingness to test the U.S. dollar's reserve currency status by ignoring our ballooning national debt is making the world a more dangerous place.
To fix the problem, Congress must first send a signal to the markets that it is serious about fiscal responsibility. This will help improve our borrowing costs and gain us time.
There are certainly outstanding questions about entitlement spending, but markets respond to signals first. Committing to stringent long-term caps on discretionary outlays, ex-defense, would help calm debt markets, reassure allies, and bridge the gap to more responsible fiscal levels.
America must remedy this internal financial threat before our adversaries move to test our capabilities on the battlefield and in the financial markets.
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Scott Bessent serves as chief executive officer and chief investment officer for Key Square Group LP, a Connecticut-based investment partnership that he founded in 2015. Bessent was chief investment officer for Soros Fund Management (SFM), the investment vehicle for the Soros Family and their foundations, from 2011 to 2015. He was an adjunct professor of Economic History at Yale University from 2006-2011.
