We've Been Here Before

In 1946, the year after World War II ended, federal debt held by the public reached 106% of the size of the entire U.S. economy. To this day, that's still the record. We're closing in on it again, sitting around 100%, but we haven't gotten there yet. What followed 1946 wasn't collapse. It was the start of the strongest sustained economic expansion in modern American history.

I bring that up because this month's headline is that the federal debt just crossed $40 trillion, and it has people asking, understandably, whether this time is different.

Nobody can tell you with certainty how this chapter ends. What I can tell you is that the $40 trillion figure overstates things in one specific way: more than $7 trillion of it is money one part of the government owes another part. It's real, but it isn't owed to outside lenders. Net that out, and the amount the rest of the world actually holds is closer to $32 trillion.

Relative to the size of the economy, that's roughly 100% of GDP. Counting everything, it's closer to 123%. Neither number is small, but neither is unusual by global standards. Using the IMF's standardized measure, Japan's debt runs well north of twice the size of its own economy. Italy's ratio is higher than ours too. Both economies keep functioning. The U.S. carries real structural advantages most countries don't have, and yet the broader point holds either way: a heavy debt load has not been the trigger for economic collapse that people keep insisting is right around the corner.

That's the pattern worth noticing. This exact fear shows up every time the number gets bigger, and it has never once been the moment everything fell apart. Not in 1946. Not in 2008. Probably not now, either, though nobody can promise that in advance.

So what do you actually do with a headline like this? In my view, nothing to your portfolio. We were never invested in the U.S. government's balance sheet to begin with. We're invested in businesses, companies that raise capital, deploy it, and grow earnings, because that discipline is what keeps a company alive in a competitive market. They don't get to print their way out of a bad decision. That discipline is exactly why long-term ownership of great businesses has built more wealth for more people than almost anything else available to individual investors.

None of this means the debt doesn't matter. It might, eventually, in ways nobody can predict yet. But so far it's been nowhere close to the disaster that gets forecast every time this number crosses a new threshold. And the bulk of what you own isn't a claim on Washington's finances. It's a claim on real companies doing real work for real customers.

This number will cross $50 trillion someday. When it does, expect the same headlines. Expect us to say the same thing we're saying now.

If that's the kind of perspective you want on a regular basis, not just when a headline gets big enough to notice, that's exactly what The Memo is for. It's free, it's short, and you can sign up below.