"A Most Fearful Evil" - The Politics and Economics of America's Debt

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America’s $38 Trillion Debt Crisis: Understanding the “Most Fearful Evil” Threatening Our Republic

The numbers are staggering, almost incomprehensible. If you were to stack $100 bills representing America’s national debt, that pile would wrap around the entire circumference of Earth, with enough left over to stretch from Boston to Chicago. This isn’t hyperbole; it’s the stark reality of a debt that has ballooned to between $38 trillion, now exceeding the gross domestic product of the world’s largest economy.

To put this in historical perspective, Ronald Reagan once described the 1981 national debt of $1 trillion as a stack of thousand-dollar bills reaching 67 miles high. Today’s debt represents a 38-fold increase in just over four decades, a trajectory that would have shocked even the most pessimistic fiscal observers of Reagan’s era.

The Founders’ Warning

This crisis didn’t emerge in a vacuum. The debate over national debt traces back to America’s founding, when Thomas Jefferson penned what would prove to be a prophetic warning. Writing from France to James Madison in September 1789, as the French Revolution was gaining momentum, Jefferson articulated a principle that seems almost quaint by today’s standards: “the earth belongs to the living.”

Jefferson’s concern was both philosophical and practical. He questioned what right one generation has to bind future generations to debt they never agreed to incur. In that famous letter, he proposed that all government debt should expire within 19 years, using actuarial tables to calculate generational turnover. His reasoning was simple: allowing one generation to saddle the next with debt fundamentally undermines the legitimacy of republican government.

Alexander Hamilton, however, saw things differently. Initially skeptical of debt, he had argued in 1775 that America should separate from Britain partly because of the empire’s colossal debt, Hamilton’s thinking evolved through the crucible of the Revolutionary War. He came to understand that creditworthiness equaled national power, that Britain’s ability to borrow money was what enabled it to field armies and fight wars effectively.

Yet even Hamilton advocated for borrowing within means and warned against excessive debt. The notion that he would have been comfortable with today’s $38 trillion figure misrepresents his actual position. Both founders, despite their differences, shared a fundamental concern about excessive national borrowing.

The Modern Debt Breakdown

Today’s debt structure reveals the complexity of contemporary government finance. Roughly 20% of the $38 trillion represents intergovernmental debt, which is essentially one federal agency owing money to another. The Social Security Administration, for example, takes in more through payroll taxes than it pays out in benefits, and other government departments borrow from this surplus, leaving Social Security with IOUs.

Another 20% is held by the Federal Reserve as part of its monetary policy operations. About 40% belongs to private investors: individuals, institutions, and entities that purchase Treasury securities. The remaining 20% is owned by foreign governments, with Japan holding slightly more than $1 trillion and China controlling approximately $770 billion, a figure that raises concerns about foreign leverage over American fiscal policy.

The Path to Crisis

While wars have traditionally driven debt accumulation, recent decades have seen debt explode during peacetime. The COVID-19 pandemic accelerated this trend dramatically, with multiple rounds of stimulus payments pushing deficits to unprecedented levels. These emergency measures, while perhaps or seemingly necessary during lockdowns, created what economists call a “vicious cycle”: stimulus spending drove inflation, forcing the Federal Reserve to raise interest rates, which in turn increased the cost of servicing the existing debt.

But the pandemic merely accelerated underlying structural problems. The federal government now spends approximately $4.5 trillion annually while raising only about $3.5 trillion in revenue. This trillion-dollar annual gap has become normalized, representing what some observers call “presentism” — the tendency of politicians to prioritize immediate electoral concerns over long-term fiscal responsibility.

Making matters worse, an increasingly smaller percentage of federal spending is discretionary and therefore subject to annual congressional approval. Most spending now goes to entitlements like Social Security and Medicare, plus debt service payments that grow automatically as the debt increases and interest rates rise.

Economic Consequences

The economic implications extend far beyond government accounting. The national debt creates what economists call a “crowding out effect.” When investors purchase government securities, they’re not investing in private businesses, startups, or innovative technologies. This shift from private to public investment may reduce the economy’s capacity for wealth creation and innovation.

The concept of wealth itself becomes crucial here. Wealth isn’t simply money or assets; it’s purchasing power: the ability to command goods and services. America remains wealthy because it produces things people want to buy, both domestically and internationally. But when increasing amounts of capital flow toward financing government operations rather than private enterprise, the economy’s wealth-generating capacity diminishes.

This represents more than an economic problem; it’s a political crisis. The idea that government spends “taxpayer dollars” has historically provided a crucial check on government power. Citizens could hold officials accountable because it was their money being spent. If government financing shifts toward borrowing against future generations or creating money through monetary policy, this accountability mechanism breaks down.

The Sovereignty Question

The debt crisis also raises questions about national sovereignty. The United States benefits from the dollar’s status as the world’s reserve currency, which creates international demand for American debt. This “exorbitant privilege” has allowed the country to borrow at lower rates than would otherwise be possible.

However, this advantage isn’t guaranteed to last forever. Should the United States ever default on its obligations, the consequences would reverberate globally, potentially ending the dollar’s privileged position and severely constraining America’s ability to finance its operations—including its role in maintaining global trade and security.

Potential Solutions

Addressing this crisis requires confronting several uncomfortable realities. Population growth emerges as a critical factor, since a shrinking workforce relative to retirees increases entitlement costs. Comprehensive Social Security reform, long considered politically untouchable, may become unavoidable.

The nation may have little choice but to attempt growing its way out of debt, and trying to increase economic output faster than debt accumulates. This approach worked in previous eras but requires policies that encourage private investment, innovation, and productivity growth rather than further expanding government’s role in the economy.

The Civic Challenge

Ultimately, this crisis reflects a deeper problem with democratic governance: the difficulty of making long-term decisions in a system that rewards short-term thinking. Voters face few incentives to support painful but necessary fiscal reforms, while politicians risk electoral defeat for advocating such measures.

The solution, if one exists, lies in civic education and democratic engagement. Citizens must understand not just the magnitude of the debt, but its implications for republican government itself. The founders’ warnings about debt as a threat to liberty weren’t merely theoretical—they were based on hard-won experience with how financial dependency undermines political independence.

America’s $38 trillion debt represents more than a fiscal challenge; it’s a test of whether democratic societies can govern themselves responsibly across generations. The outcome will determine not just the nation’s economic future, but the viability of the republican experiment itself.