The Dividend Cafe - The Actual Truth about the National Debt

Episode Date: May 15, 2026

Today's Post - https://bahnsen.co/4d5naRq David Bahnsen discusses U.S. national debt after total federal public debt surpassed 100% of GDP, defining it as $31.27T in Treasury securities versus $31.22T GDP, distinct from state/local debt, intergovernmental debt, and unfunded liabilities. He explains who holds Treasurys (foreign holders, the Fed, U.S. households, and banks/pensions/insurers) and why Treasurys serve as the global risk-free rate, rooted in confidence in repayment supported by U.S. economic strength and taxing authority. Bahnsen argues the key problem is persistent deficits (~6% of GDP) growing faster than the economy, projecting debt near $50T by 2040, driven mainly by entitlement spending rather than military, fraud, or insufficient taxation. He says growth is necessary but not sufficient, warning reforms will involve pain, and closes by advocating diversified, valuation-conscious dividend growth investing as an attractive risk/reward approach. 00:00 Why Debt Matters 02:43 Crossing 100 Percent 03:43 Debt Definitions 06:14 Who Owns Treasuries 08:42 Why Treasuries Work 14:14 What 100 Percent Means 17:38 Deficits Keep Growing 20:09 What Caused It 27:08 Hard Choices Ahead 29:13 Investor Takeaways 32:47 Dividend Growth Close 33:20 Thanks And Wrap Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this week's Dividend Cafe. I'm your host, David Bonson, and we are going to dive into one of our favorite subjects this week, one of the most depressing, one of the most difficult, one of the most painful issues to talk about. and yet, I think, one of the most important, that is that of the national debt. Now, let me start off by saying, I allude all the time to the fact the Dividing Cafe, every Friday, a weekly commentary that I've been doing since September of 2008, where I am trying to avoid as much as possible the temptation to go into what exactly happened that week and do it as a weekly commentary focused on weekly headlines. But a lot of times the weekly headlines are what we do need to cover because of the significance of what has happened and the ability to use a weekly headline to try to reiterate a longer term principle.

So while we may, let's say, talk about the Iran War a couple months ago, it wasn't so much a dividend cafe about the Iran War and what happened that Thursday or is going to happen the next Tuesday. but using the current events to make a bigger point for investors, more evergreen principles that apply to a longer term period of time. And what we are to do as investors, how we're to think about certain economic news, geopolitical realities. When you talk about the national debt, it's generally a pretty long-term subject that I want to be writing about all the time that carries decades upon decades of relevance and ramifications. and yet isn't always in the headlines. It isn't always the story of the week. It's one of those things that's hard for the media to cover because it doesn't have the short-term glitz of a particular weekly inflation print or a weekly geopolitical turmoil or a major news breakout that obviously attracts headlines. I understand all that, but I'm just talking to you about the way

I think about these topical assignments within the kind of mission I have of the Dividing Cafe. And so what has happened is that these short-term things so many people care about, actually for this week, the last couple weeks maybe, is aligning a little bit with my long-term mission of focus in Dividing Cafe. And that is the long-term issue around how to think about the national debt in the United States and all the principles and ramifications of that that I'm about to get. get into for you and unpacking what I believe is going to be a wonderful dividend cafe, that there is a kind of current moment that is drawing this into the headlines because the numbers came out about two weeks ago that we are for the first time past this rubicon of

total public debt being over 100% of GDP. And so that has at least led to more question. It's led to a few stories here and there. I wouldn't say I got quite the glitz and glamour in the social media world or headlines or cable news world that the normal, really exciting stories around a new AI threat or a market rally or a market crash or, of course, the Iran War and things like that. You know, those things are still a bit more exciting topically. but there is a short-term angle that is, I guess, inspired me to come back to this subject that I've obviously written about so many times in the Dividing Cafe. Let's first just kind of clarify a few things mathematically, because I made the comment a moment ago that we've passed this Rubicon of over 100% debt to GDP.

We're referring to something called the total federal public debt. Right now we're sitting at 31.27 trillion. dollars. And I want to be clear because you're going to hear different numbers in different context. 31.27 trillion's accurate number of total federal public debt, and I'm defining it as the total treasury debt outstanding. And another way to define it in layman's terms is the money our government owes. The money our government owes to others. Okay. O's to others. What is not included, and I'll give you a few numbers here real quickly, it's about $6 trillion of state and local debt. Okay. Our states owe a $2.7 trillion, cities and counties about $2.2 trillion, schools and counties about $2.2 trillion. School districts, another $1.3.

That's all separate. That's not money the United States federal government owes. We'll put that off to the side. But the bigger thing you may hear about is the $38 or $39 trillion of national debt. And there's what's call it $7 trillion of debt that our government has to itself, what we refer to as intergovernmental debt, where they have borrowed from primarily the Social Security Trust Fund. There's some of that in Medicare trust fund and other little government bureaus. I don't want to get in the weeds on. But basically, the 38 or 39 number is a real number, but it is about $7.7 trillion that they owe to themselves. And so for the best apples to apples comparison of how we think about our total debt relative to the size of our economy and the way we would measure that with other countries, the total federal public debt is the best way to measure it.

And so the $31.27 trillion of debt is up against, you can wait for it, a GDP of $31.22 trillion, hence the 100% number being passed. I shouldn't smile about this. It is a big deal. But what does it actually mean? We're going to unpack that here in a moment. The composition of that debt is important to understand. Who do they owe it to? We're talking about the debt we take is in the form of, I'm just going to call it Treasury bonds. We have a thing called Treasury notes and Treasury bills and Treasury bonds, and they're all the same thing. They're Treasury securities, which is debt the government owes to someone else who owns it as an asset. And the only difference to, you know, note, a bill, and a bond is the maturity, okay, the amount of time from issuance until when it is paid back. Roughly 30% of our treasury debt is owned by foreign either investors or more so central banks and sovereign wealth funds,

other foreign countries that have purchased U.S. debt. About 15% is owned by our own federal reserve. It's a little bit less than that. And that was the byproduct of all those years of quantitative easing. The Fed owned a lot less of our debt previously, but they used their balance sheet as a monetary policy tool. I've talked about this a lot in Dividendon Cafe, and hence now became a big holder of U.S. national debt. And then it's over half of our debt, 30% owned by U.S. household savers, investors, some of that in the form of mutual funds and ETF, some held outright, and then 25% held by banks, pension funds, and insurance companies. So I'm dividing the latter two categories, investors, individuals, savers, 30%, banks, pensions, insurance companies, 25%. It's a little bit over half that are yield sensitive.

They want a good rate of return. They own it as an investment. They own it as a liquidity tool, a savings device. The first category, they may be less yield sensitive. The Fed's not trying to make a buck on owning a treasury debt. The Fed bought it as part of a monetary policy tool. to affect some sort of monetary policy objective that they have, generally trying to manipulate the yield curve or interest rates.

Central banks have other countries, sovereign wealth funds of other countries. Likewise, they have a less yield-sensitive objective and more of a currency objective. And so it's less about trying to get a rate of return and more using it as a tool in how they affect their own trade balances or their own currency objectives in their own country. Well, why do people lend to the United States government per se? Why is there $31.27 trillion, whether people are yield-sensitive, savers and banks, or not yield-sensitive, central banks and foreign governments?

What is it about the United States government that has made the Treasury bond, this extremely appetizing vehicle? And the answer is that people believe they're going to be paid back. Okay, that there is a high degree of confidence in repayment. And it is very important because what happens is that that full faith and credit of the United States, first of all, allows people to borrow, but then allows them to continue borrowing. that even as that debt is run up, this high degree of confidence of being paid back has led the ability to continue generating more debt. So if they lost confidence in repayment, first, they couldn't issue more debt and fund the massive

expenditures it takes to run this country. And in the meantime, you have the kind of benefit to the U.S. government that they can continue to raise money because people believe that they're going to get paid back so they'll lend to them add infinitum, but then you also have the benefit to the investor saver lender, if you will, because they have this high security asset they're going to get paid back. And what that does is the payment, the ability to continue lending and borrowing and the high degree of confidence in repayment allows the Treasury bond to be used as the risk-free rate in all of investing.

The fact that there is no risk of not getting paid back allows that to be considered as a kind of baseline relative to anything else one may do. Higher risk investments, lower risk, but still more risk than a treasury. And so whether it's a corporate bond or stocks or real estate, there is always a kind of reference or comparison to a risk-free rate that serves as a baseline in all of investing. and that risk-free rate has become a United States Treasury. And I think that there is very few things in investing more foundationally important than this idea of a risk-free rate. The interest that gets paid on $31.27 trillion of public federal debt as the risk-free rate is this axioma

which all global economics turns. I don't say it to be melodramatic. It's a very, very big deal, but I also think it's entirely rational. Why is it deemed to be risk-free? We've existed as a country for 250 years, and we've never missed a principal or interest payment. We've always been able to sell our debt. We issue new debt. We have a gazillion police and guns and military resources to collect to make sure people are paying their taxes. So I'm trying to be polite here, but let's just say we have an effective enforcement mechanism in credit collect. At the end of the day, what is it that they are collecting from?

Their ability to extract from the economy, the extraction ability is very high, but what they're extracting from is very important. And what that is is a robust, dynamic, growth-oriented economy, a diversified economy. And so you think about a bank lending you money for your mortgage. The loan that they're giving is as good. as your income generation, your savings and credit resources, and your character. And then the collateral of the loan is as good as the value of the home they've lent against. But when you or I or an insurance company lends to the United States government, it's essentially as good as

the economy that the government can extract from to pay their debts back. And that economy has been the envy of the world. There's been recessions. There's been difficult challenges. There are all sorts of imperfections, but relative to the rest of the world. And when you factor in the diversity and dynamism, it's been an extraordinarily good bet. There are countries that are very non-diversified. They have maybe a single commodity that they export. They have a geopolitical vulnerability, a military weakness. There are all sorts of elements that make, you know, some countries do not have great flow of goods and services. A lot of countries do not have good flow of labor, do not have good flow of capital. The United States, when you factor in our robust trade, dynamism, labor,

and capital, this is the story. This is what the Treasury bond is fundamentally about, is, yes, the power of a government and its power for extraction from the economy, but it is rooted to the economic mobility, dynamism, power, robustness of the economy itself. Okay. Now, when you say, well, that was all true until two weeks ago, the fact of the matter is that it is not good to have the debt be equal to the size of the economy. And yet we're going to walk through what this exactly means. I like the way I put it in the written dividend cafe. So I'm just going to read from that if you don't mind.

So I capture this the right way. 100% of debt to GDP. What this means is that if 100% of all output of the entire economy for an entire year went to the national debt, we would not pay it off. And everyone would die of starvation. Okay. So if 100% of economic output went to the national debt and now would not technically be paid off. And as I mentioned before, that does not. include California and Michigan. It does not include the money we owe to Social Security. It does not

include a lot of other elements of public finance. And by the way, it also does not include what I'm going to call $85 trillion. Okay, now we're talking about basically almost triple the real national debt in what we refer to as unfunded liabilities. Now, I'm being conservative. It could very well be 150 trillion. I don't want to do melodrama. You go, why don't we know the number? You're an economist. You study this. How come we don't know the exact number? Actuarial math by definition is not knowable at a finite point in time. It depends on what the actual actual assumptions might be, all of which are variable. How much we owe in future Medicare costs that we do not have in money right now to pay, the unfunded liability, is unknown because we don't know what the health care

cost themselves will be. The future is the Social Security payments that we make. We don't know because we don't know the mortality that people were paying them do. It's perfectly acceptable if you want to assume that all the numbers are worse than we presume. It's also possible that could be better than we presume, but that's what actuarial math is, whether it's an insurance company or a pension fund calculation. We have to do the same in governmental actuarial assumptions around future Medicare and Social Security. But the point is these assumptions are unfunded. And, And so there's a significant amount of money there too. Why do I not join the really sensationalized doom and gloom? If you want to paint a negative picture and get everyone's attention,

why not throw in state debt, local debt, school district debt, Social Security, Medicare, to make this thing sound as bad as possible? Because it is bad and all these things are legitimate. But the reason is dishonest. They are separate compartments that have various different funding mechanisms. The only thing that is going to pay back treasury bonds is the taxing authority United States pulled from the economic resources of the U.S. economy. In theory, the Social Security and Medicare math could change from policy adjustments, changing rules of eligibility, changing the ages, changing means testing. I mean, there's other things out there. I'm not suggesting that they do some or don't do some. I'm just saying it's a different knob turning than the

total public federal debt. So these are separate categories. All right. Let's just hold ourselves right now to the $31.27 trillion of public federal debt. How are we going to pay it down? I would like to point out that that is not even close to the question. If a household has $100,000 of debt and they are working and working and working to reduce it, and it goes down to $99,000, The next year, $98,000, $97,200. Year over year, they can get very, very discouraged. They're barely making a dent in it. And then that's all of these resources that can't go to more enjoyable use or more productive use

because they're just trying to dig out of a hole and it feels like they're not digging out of it. That sounds really bad, but they actually are reducing the debt. What we are dealing with is not how are we going to pay this out, but how much more are we going to add to it? We have a debate, a fight in our country every single year of whether or not we're going to add two trillion more to the 31.27 trillion or just a measly one and a half trillion more. That's the conversation. And it strikes me as utterly ridiculous. Deficits are running about 6% of GDP annually. We're growing the economy right now in good years at about 2%. So we are growing the debt faster than we are growing the economy and have been doing so for some time. And this sits on top of that $31.27 trillion of national debt. The projections for this then mean that if everything goes really well, if nothing worsens, if we stay with what it is we're talking about doing, don't get talked into new spending packages, don't have hits to revenue from a recession or economic contraction or complication.

don't have a national emergency, a war that breaks out hypothetically, that we end up with something in the range of $50 trillion of national debt by 2040. Are you feeling better yet? Well, let's start to have a very honest conversation. What caused this debt and what is causing these deficits? I want to give a caveat I often give in Divencafe, because we're going to wax and wane in areas that overlap with political ideology. I have never hid the ball since the day I started Dividing Cafe about my own political leanings or worldview.

I'm a Reaganite conservative. I find myself on the other side of an awful lot of issues with the current Republican administration, but I am not a left-wing Democrat or progressive. I am one who generally is pretty favorable to laissez-faire economics to a limited tax and regulation, to a limited government spending, and size of government. That's the broad worldview from which I come to the degree that I believe it most promotes the cause of human flourishing that I believe in. And I can be wrong on certain things.

I can be right on things. And then you could debate the weeds and details of certain tax policy. But that's the general inclination from which I come. And others have their own political ideologically. and all that. What I want to do right now is just talk about math. And I only bring up the political side because even math is hard to do without your own biases and your own presuppositions entering the fray. And I'm admitting that. But when I say to you objectively, military spending didn't cause this, I'm just giving you the math that right now we're spending about 13% of federal outlays on military.

Now, it was 80 or 90% during World War II. It came down to 50 to 60% well after that, stayed there forever. When Reagan was determined to finally win the Cold War, we were sitting in about 25%. Even when we talk about all the big military cuts in the Clinton years after the Soviet Union had fell, we were still spending over about 18 to 20%. Even with the Iraq and Afghanistan wars, it was sitting somewhere 20, 22%. at 13% we're basically right now lower than we've been at any point in anyone's lifetime that is listening to Dividing Cafe right now. So you can think we still should be spending less and that's fine. But mathematically it's not the contributor to where things are.

It's at a very low percentage of outlays by any historical standard. Likewise, a lot of my conservative friends love to talk about fraud, waste, and abuse. and I like to talk about it because it appalls me. It is loathsome that we spend any public money wastefully. And where there is corruption, we should call it out. We should stop doing it. We should save the money. But to pretend that that's true and it is the factor in our debt is mathematically absurd. Soaking wet these things don't add up to a tiny, tiny fraction of total annual deficit spending. The analogy I use is that I often, you know, I freely admit that I'm a blessed person that makes a good living. But I do often find that I've been paying some cable bill on a house I had years ago that I just never noticed or an old iPad of one of my kids or iPhone or something.

And I never called AT&T and that type of stuff. You know, these things all added up soaking wet. It's an annoyance. I don't want to do it. An extra 60 bucks a month here and 150 a month there. but I don't notice all those things, but they obviously are immaterial. And that's what we're talking about as an analogy, governmental debt with fraud, waste, and abuse.

It's big numbers and it's totally wrong, but it is not the contributor to where we're talking. I would add, by the way, that those who say we're not taxing enough. And this is how this helps us to get to the bottom line. Now, you may think I'm being ideological here, but actually I'm not really referring to what we should be taxing. You know, right now the top 1% of taxpayers pay 46% of federal income taxes. And if you do believe that it should be higher, that's fine. Suffice it to say I don't.

But 1% of taxpayers earn 22% of total income and they pay 46% of total federal taxes. And so if one ideologically believes that ought to be higher, that's one thing. but as a percentage of GDP with this progressive tax code we have now, we're basically at about 17.5% of GDP is tax revenue. And at the highest marginal rates and most progressive rates we ever had, it's about 17.5%. The thing that has changed is that government's spending is now 23% of GDP, while tax revenues are about 17 and a half percent of GDP. That's what's changed. For decades, the average of GDP from government spending was in between 17 and 18 percent. And now it is 23%. So you can look at taxes, you can look at tax revenue, you can look at military

spending, you can look at fraud, waste abuse. But what you have, you have, you have, you have, have essentially from a bottom line standpoint. I want to make this as simple as I can. We used to spend about 17 to 18 percent of our economy funding the government. We ran some deficits, but they were small, and the economy was growing at a faster clip than the deficits were growing. A lot more money went to National Defense than it does now. The total debt was about 50 to 60 percent of the economy. Some people were worried, but it was all pretty contained. And the economy was growing greater than 3% per year net of inflation, and that it's even after accounting for what would be inevitable recessions that would come up occasionally. We are now spending 23% of our economy on

funding the government, and we're growing deficits more than double the speed at which we grow the economy. Less of our resources go to military spending than at any point in decades, and total debt is now higher than 100% of the economy. The economy has been growing. at 1.9% for the last 18 years, which is about 60% in what it had been from 1946 to 2007. This is the story, my friends. Additional government spending almost entirely outside of military and wasteful endeavors and boondoggles, but effectively in the social safety net of the country. The growth in entitlement spending, Social Security, Medicare, health care, these mandatory contributions to federal outlays. That's the math. What are they to do about it?

I'm going to make a comment that I'll immediately qualify. There's no solution. There's no scenario by which this gets any better or begins to be addressed without a robust focus on economic growth. However, unlike what I would have said in 2010, 11, and 12, when we were becoming very worried about the direction of this, growth alone, in my opinion, will not be the solution. It is a necessary, a vitally necessary, but at this point not sufficient condition for repair. Any public policy portfolio that does not promote economic growth is futile, period. You are going to have to get enhanced growth and productivity to be able to, to get around this. But I am also very skeptical that we can solve these problems without some

pain, some problems, some tradeoffs. We're just living through a period right now where we're trying to figure out how much we can kick the can. People don't want to take the pain now so they knowingly are putting off the pain to be worse later. And do I believe it's immature? Do I believe it's immoral. I believe it's reckless. I most certainly do, but I also think it's totally self-conscious. Now, what are some of those issues that are going to involve pain points? Social Security adjustments, spending cuts, higher taxes. There's any number of elements, all of which I think are going to end up being on the table, the total aggregation of which is inevitable. But there will be some degree of pain. I wrote about this about a year ago now.

I don't think you can start this conversation when you assess and understand it without entitlement reform. I think that this is obviously the mathematical reality that get you past your cable bill into your actual real-life P&L of where money's going and you can address what needs to be done about it. But I want to close out by talking about what it means for investors. We often talk about the fact that there is such a problem of a growing debt relative to the size of the economy that the interest investors demand is going to go higher and that we have a big issue to think about with bonds, with the treasury bonds. Are we going to get to investors demanding 10% for the United States treasury bond because the risk is so high about being able to be paid back of this so-called risk-free rate, of this so-called extraction from a greener.

growing economy, et cetera. And I guess I'd offer a contrarian suggestion that I mentioned for a reason, I buried the lead a bit, the four categories of buyers that make up the composition of those who hold U.S. Treasury debt. Perhaps the focus just goes to those non-yield sensitive buyers, whereby the central banks become the buyers as a means of affecting an interest rate policy, where central banks attempting to play around with their currency are the buyers. And therefore, the entire premise about treasury rates could be right, but lead to the exact opposite conclusion. I don't want to be smug about this, but I want to point out,

I'm not saying this as a hypothetical only. I think it's a very strong hypothetical. But, you know, it's not really that hypothetical since we just did it. for 15 years with QE since Japan did it for 30 or 40 years, since Europe's in the middle of doing it, there's all sorts of mechanisms of financial repression by which people might be totally misunderstanding that. But I'm saying we need growth to get out of this. When investors take risk to get a return, they need and assume and require growth. And this is where I want to close things out for investors in this week's Dividing Cafe.

is the necessity of economic life, definitely for solving our current situation of excessive debt, restoring political order and opportunity. But I don't think deep speculation hits the growth notes. It risks falling into a graveyard of speculative manias. It may very well pan out for investors, but perhaps when we talk about the need to be invested in growth and see, an economic growth that takes hold that helps drive a better denominator when we think about the numerator of our debt. But that growth in the way investors access it can be diversified. It can be rational. It can be coherent. It can be repeatable. It can have basic calculation to it that makes sense. Evaluation conscious, all of these things. It can be rooted to coherent businesses, defensive

business models that transcend speculation and get out of a governmental focus in your investment and into the private enterprise side from which all real economic growth and productivity comes. But with that level of maturity and coherence, you're referring to the generation of abundant cash flows, defending to, like I said, a defensive and sensible business model. And my friends, that's what we refer to as dividend growth investing at our firm. Now, I want to be clear, I don't think dividend growth equities are the new risk-free rate. Risk-free is risk-free. But I will say that in a country with 100% debt to GDP and a world where risk is a necessary part of your return,

I'm not sure you're going to find a better trade-off between risk and reward than such investment approach to dividend-growth equities. This is the world in which we find ourselves. This is the world in which we are trying to navigate. And to that end, we will work. Thank you for listening. Thank you for reading. Thank you for watching the Dividy Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC,

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