Pod Insights Search Engine Why the national debt might finally matter About this episode In a moment of deep economic uncertainty created by our tariff-loving president, suddenly, our national debt has become much more important. Important enough that, this week, we have decided to teach ourselves everything about it – how America first created its national debt, and how it got out of control.
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Comment on this episode https://pjvogt.substack.com/p/why-the-national-debt-might-finally
Explore a colonial merchant ledger https://amhistory.si.edu/american-enterprise/merchant-ledger/
Brendan Greeley https://history.princeton.edu/people/brendan-greeley
Noahpinion https://www.noahpinion.blog/
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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2:40 PJ Vogt? Hello.
2:41 Speaker 01 Hello.
2:46 PJ Vogt? That is so serious. Ronald has.
2:49 Speaker 01 I was matching your energy, man.
2:51 PJ Vogt? I know. It was absolutely my fault. I was like, it's like we were about to like handshake before a duel.
2:56 Speaker 01 Yeah, duel or joust. Yeah, it was coming.
3:01 PJ Vogt? This is Ronald Young Jr. He's an audio producer, a storyteller, host of the podcast Wait For It. He's appeared on Search Engine before, answering a question for us. But now he'd written to us with a question of his own, and so we invited him back to tell us about it. It was a question about the economy.
3:20 Speaker 01 I am at a place where I think I'm a pretty smart person. I think I understand things. I understand stocks. I listen to Planet Money. You know what I mean? Like, I'm an NPR guy. I read. I understand numbers. And the one thing that I will never understand is the United States' national debt. Something that congresspeople run on, that the president runs on, that senators run on, that everyone is always talking about one way or another. We gotta cut this wasteful spending, decrease the national debt. We gotta decrease it because it's bad for the economy. It'll explode, all that. And I hear that. And when I think about having debt, you know, I pay rent.
4:03 Speaker 01 I had student loans. I have credit card debt, like all that. There's somebody that I owe money to.
4:09 PJ Vogt? Yeah.
4:10 Speaker 01 Like, you know what I mean? Like, you max out a credit card, somebody's coming to say, hey, you owe us interest. And also, if you don't pay this, we're going to take you to court, and then you might get your wages garnished, so on and so forth. But when I think about the national debt, I'm wondering who owns the debt of the United States?
4:29 PJ Vogt? Yeah.
4:29 Speaker 01 When they say we have a national debt, who do we owe money to? That's so confusing to me. I don't understand what that means. And it feels like I need a new civics lesson here.
4:38 PJ Vogt? And is your question also like? I'm kind of disorganized sometimes and not always great with money. And like, I've had more money and less money different times in my life. So I know what it's like when something goes to collections. I know what it's like when you get a phone call. And I don't understand if national debt, we're using the same words that we use for personal debt, but how much am I supposed to be thinking of the country as like me? Like, is it like, does like Donald Trump, is it like, oh, I'm not answering that number because he knows?
5:10 Speaker 01 That's exactly it.
5:15 PJ Vogt? Ronald first emailed his query in February. Who exactly are we in debt to? What happens when you don't pay those bills? At the time, it felt like one of those background questions that bobs to but never quite breaks the surface of my mind. You know, every time a budget has to get approved, experts talk about the national debt. Some people get upset. Most people quickly forget about it. Even the Tea Partiers seem to have disappeared. So I was curious, but not urgently curious. But then our new president really started mashing buttons on the economy's gamepad, and my curiosity heated up. Working on this story, I started to see how things I didn't know were connected to the national debt. Tariffs, our fight with China, Jaina, all of it actually did connect to the bills we owe.
6:00 PJ Vogt? After the break, how it all works and what it all means. We're going back to the very beginnings of American debt.
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8:41 PJ Vogt? Welcome back to the show. Okay, so first things first, can you say your name and what you do?
8:47 Speaker 02 Hi, my name is Brendan Greeley. I am right now a PhD candidate studying the history of money and finance. And for about 20 years, I was a journalist and for 10 of those, I covered the Federal Reserve.
9:01 PJ Vogt? Brendan has never been on mic at Search Engine, but his brain is in the show sometimes. We go to him for help understanding economic concepts, inflation, taxes. Shruti, our show's editor, she knows him because they both worked at The Economist together a long time ago. He's quite sharp. So, okay, before we even get to the question I have, one of the meta question I've been thinking about for the past couple of days is like, I just like, people's curiosity leads them to different places. I have never been somebody who thinks too much about markets. I definitely have not really ever thought very much about the national debt. I think for me, part of what's going on as often happens in, say, like, the last decade is like,
9:44 PJ Vogt? there's some reliably somewhat boring part of how the world or the country works. And then you find out it might be breaking and you're like, well, I guess I should understand this.
9:52 Speaker 02 Yeah.
9:52 PJ Vogt? What, but for you, like, as somebody who, your life has just led you to think about markets and currency and stuff like, was there some signal event early in your life that opened the door of wondering about this? Like, do you remember a time before you cared and what made you start to want to know?
10:10 Speaker 02 Oh, that's, yeah, so I was at Bloomberg Business Week as a features writer and I was covering the tech industry in 2010. I was writing the same story over and over again about how, you know, the wireless carriers were ruining America and stealing all of our money. And I just, I bored myself. So, I, at the time, the profession of economics was changing because economists, you know, sort of didn't really see 2008 coming. Economists have so much sway over the way we see the world. We have a National Economics Council. We have a Council of Economic Advisers. Like, it's actually confusing to people who cover this, which organization does what? Which body is inside the White House? Which body is outside the White House? But they're all economists, right? We don't have a National Sociologist Council advising the White House
10:55 Speaker 02 or a National Historians Council advising the White House. Economists, sort of alone among the social sciences. Get this much pull in our lives. So the way they see the world is massively important. And I began to realize that this is still kind of what I do, that there are holes in the way they see the world, and one of those holes is history.
11:17 PJ Vogt? So Brendan went back to school, to Princeton, to study that history. He's reexamining a story he's spent much of his life with, the Econ 101 story of what money means. I was here just to answer a seemingly simple question. What does the national debt mean? And how worried should I and Ronald Young Jr. be about it? But Brendan's story drew me in. It went back further to how America invented its own notion of debt and how Americans decided how they should feel about it. Those ideas just have deeper roots than I imagined. Search Engine Before It Ends will tell you the origin story of every single object or concept you've ever encountered. This week, the origin of money in America. Chapter one, Before the Dollar.
12:02 Speaker 02 Before the revolution, one of the biggest challenges that the colonies had consistently, people complained about it all the time, was that they didn't have money. And that doesn't mean that they were not wealthy. It meant they literally did not have the substance to hand to somebody else to clear a transaction. America at the time, or at least that part of America, doesn't really have any silver or gold wealth, which means it's got to come in from abroad. And England had done two things to make that even more difficult. One is they didn't allow the colonies to charter anything like a bank. And the other is the Navigation Act actually meant that it was very difficult to trade with the entire world, and all the silver tended to come up from the Caribbean at the time.
12:43 Speaker 02 And that would come up to the colonies in return for some wheat, some hogs, but it had to come through the English colonies. There was some smuggling. Sometimes, literally pirates of the Caribbean would come up to Pennsylvania, or sometimes even to Baltimore, and sell their silver. So there was this competition among the colonies, see who could get the silver. The silver was important, again, not just as wealth, but as like ways to make sure that one person can pay another person. So 17th and 18th century textbooks for merchants.
13:14 Speaker 02 Drew distinctions between what they called at the time, real money and imaginary money.
13:18 PJ Vogt? Wait, were you reading colonial merchant textbooks?
13:22 Speaker 02 I don't know, man. We all do weird stuff for our professions.
13:26 PJ Vogt? Wait, so if I were a colonial merchant, selling, I don't know what, what were the merchants selling?
13:32 Speaker 02 Depends on which colony you're talking about.
13:34 PJ Vogt? I have Pennsylvania. I'm a Pennsylvanian in every version of my life.
13:37 Speaker 02 Then you're selling wheat and hogs, south down the Delaware River to Jamaica and Barbados.
13:44 PJ Vogt? Okay, so in the pre podcast era, I'm a colonial merchant from Pennsylvania, selling hogs down the Delaware River. And I would have thought like, you know, mainly I'm passionate about hogs, but I need to understand the financial system I'm transacting in. Podcasts don't yet exist. And so the avenue for my curiosity is that as an adult, I would have bought a financial textbook. And then what would I have found in this financial textbook? What would I have been learning?
14:10 Speaker 02 These textbooks drew a distinction between real money and imaginary money. And so from our perspective now, that sounds like imaginary money is a judgment, like it's monopoly money. It doesn't matter. But they took it very seriously. Both kinds of money were equally valuable, but they had different purposes. So real money was a coin. Imaginary money was some kind of a contract. And there were two major kinds of contracts. One was what we call negotiable paper.
14:33 PJ Vogt? Negotiable paper.
14:34 Speaker 02 It's just an IOU. We would call it a promissory note. It's a piece of paper and it's roughly the size of a dollar bill today. I think it holds the same function. And you just write down, you know, I will pay you back on this day, the following amount.
14:46 PJ Vogt? And were these promissory notes, they're, they're pre-paper money. They're being written.
14:51 Speaker 02 Be very careful about what you say about paper money. They are paper money.
14:54 PJ Vogt? Oh.
14:55 Speaker 02 But they're paper money written by private citizens.
14:57 PJ Vogt? Okay, but they're pre like the green US dollar that is in my pocket, like the promissory notes predate that, yes?
15:04 Speaker 02 Yeah. The promissory note was just a piece of paper that had a promise written on it. You and I don't know each other. I don't know that I could write you a promissory note, but I know your executive producer, Sruti, very well. So if I owed Sruti money, I would write her a promissory note. But Sruti could sign it over to you in the way that we used to sign over checks. And she would sign it to you. And now I owe you money. You've got to come back to me. That's my note that you've got to collect on from me.
15:27 PJ Vogt? So these promissory notes, they're not literal dollar bills. The government's not printing them. But Brendan says they're serving the same function. Promissory notes are money. They're as much money as the cash you'd get from an ATM today. Back then, debt and credit were tracked another way that also feels like a primitive version of something we'd recognize. The same way we lend our friends money or pay them back with Venmo and PayPal, businesses in the colonies kept these physical books, big public ledgers, that tracked credits and debts.
15:59 Speaker 02 It's easier to think about on a bar. So I've looked at colonial bar ledgers because they're so much fun because they tell a real story.
16:05 PJ Vogt? And what's a bar? You mean like literally like the money that had been spent and owed at a drinking tavern? Like a bar?
16:12 Speaker 02 Absolutely.
16:13 PJ Vogt? Got it.
16:13 Speaker 02 And so there was a big bound ledger. It was about, you know, sort of a foot and a half by two feet. It was a big thing. And my theory is they would actually haul it out on the bar and like call out the debts so that everybody understood what was happening because debt is also the social thing that everybody's got to understand and agree with. Because there are all sorts of stains on the covers of these books. They're a mess. I think that like people were spilling drinks on them and stuff. But nobody ever paid cash. So there are some coins coming in. Again, there's trade with the Caribbean. That trade tends to bring silver Spanish mill dollars into the economy, but there's just not enough of them to base the entire money economy on them. So America had this tradition very early on, before anything that we think of like
16:56 Speaker 02 our current bank bills, of people understanding that you could sign a piece of paper and move it around the economy and it had value and you could buy things with it. People have to get used to this idea. It takes a long time. It's a weird thing.
17:08 PJ Vogt? But it's funny. It's like what I hear you saying, which is like the history of money, there's different stories of like how we got here.
17:16 Speaker 02 Yeah.
17:16 PJ Vogt? And the one that I've gotten from like really like pop economic journalism that you are like not as friendly with is money starts out and it's very physical and it's like metal and coins. And at some point, we become more comfortable with the way things look today, which is that money is much more an idea. And that idea is kept as like, you know, like most of the money to my name is not dollar bills in the bank. It's like numbers on a ledger kept by my bank. And what you're saying is, no, no, no, even at the very beginning of American history, money was much more about. Promises made, promises capped, debt as a thing written down.
17:59 PJ Vogt? And the idea of a pocketful of coins was more the exception than the rule. The same way most of our money is like, quote unquote, imaginary now. Much of our money was, quote unquote, imaginary then.
18:09 Speaker 02 Yeah, congratulations. You just wrote the introduction to my book.
18:16 PJ Vogt? Brendan didn't pay me to do that. He's now in debt to me. According to Brendan, in colonial America, debt itself was not inherently viewed as bad. There's a Shakespeare line, neither a borrower nor a lender be. But in our country, when there wasn't enough currency to go around, everyone had to be both. We ran on a system of IOUs that worked pretty well. Your promissory note was valuable because I trusted you to pay it. And you paid it because if you didn't, your future IOUs would no longer be honored. But that ad hoc system begins to evolve.
18:49 PJ Vogt? Chapter two, the birth of the American bond. So back in colonial times, the colonists themselves are writing these promissory notes, trading IOUs. Money is being created out of thin air by just anybody. That changes. States start issuing promissory notes because states want to borrow money too sometimes. And then during the Revolutionary War, the government suddenly needs a lot of money. So it prints it. The Continental Congress printed paper currency, basically IOUs. These IOUs were as valuable as your faith that the country would win the war and be able to pay those IOUs back. America did win. And the idea of the government printing money stuck around.
19:33 PJ Vogt? The new federal government would now create money by creating debt. Creating IOUs, the government promised to pay back later. After the war, Alexander Hamilton took that idea and scaled it. He consolidated all the war debt, federal and state, into a national debt. He did this while rapping. The new federal government issued bonds, American IOUs, that anyone could buy. And because the government guaranteed bonds would be repaid with interest, a market formed for these bonds, a market that still exists today. Americans buying the bonds were helping to fund their own new country. In the beginning, these US government bonds were held by citizens. They were also held by banks.
20:14 Speaker 02 And so increasingly, over the course of the 19th century, you see federal debt becoming a bigger and bigger part of the banking system and a bigger and bigger part of the bank notes that we traded around.
20:24 PJ Vogt? We're going to fast forward a bunch here. Fast forward the Civil War, bank failures, federal deposit insurance, the invention of the Fed. Because I think all you need to know this week is that American federal debt will, over time, become not only the way that the US government will start to pay for staff, those IOUs will become so reliable, so valuable, that the rest of the world starts to use American IOUs like money. In the sense that investors can trade bonds or they can hold on to them, knowing that a US bond's value is stable. It won't swing in wild ways. And that's sort of what our modern system looks like today. When the federal government wants to borrow money, wants to sell debt, investors line up to buy it in the form of government bonds,
21:08 PJ Vogt? treasuries, US government IOUs, which other investors treat like money. And other investors love using these IOUs and always have. Because what makes them so unique is that for a century, the United States has mostly seemed like an immensely safe bet relative to most other places you might park your cash. We will get to what it means this month, now that that has begun to change. Right now, we're still on the history.
21:39 PJ Vogt? Chapter three. Things begin to get out of hand. One thing I was very surprised to learn this week is that in America, for many decades, even though the government could take on lots of debt for cheap, borrow on metaphorical credit card after metaphorical credit card, we were actually, for a very long time, shockingly responsible about all this. For years, no matter who was in power.
22:04 Speaker 02 Until very recently, until like late 70s, early 80s, every new debt issue had to be approved for a reason.
22:11 PJ Vogt? Okay.
22:11 Speaker 02 The Treasury went to Congress and said, "We're gonna fight a war," or "We're gonna build things," or usually it was fighting a war.
22:18 PJ Vogt? Yeah.
22:18 Speaker 02 And Congress said, "Yep, we agree. That is important. You may borrow money to do that." So there wasn't a regular, liquid, massive market of treasuries, the way there is today, until very recently.
22:31 PJ Vogt? So before the 1970s, what you're saying is, like, assuming that I was a person who thought a lot about the national debt, like in 1932, or 1951, or 1965, it would have been more possible to say like, "This year, the national debt is X," and like, go through the government's like credit card bill and kind of see where we spend it. What happens after the 1970s that changes that?
22:54 Speaker 02 In the early 80s, there was a paper called "Some Unpleasant Monetarist Arithmetic," which basically said, "We're not seeing necessarily the rise in risk premiums for American debt." So it may be that, and this is an important asterisk, so long as the debt is buying something productive, that you can issue much more of it than we thought.
23:17 PJ Vogt? Brennan's interpretation, looking back, is that over time, America's view of its own national debt slowly shifted. The new logic went, "Maybe we could actually borrow more, like way more than we used to, and maybe paying it back matters less than we thought. So long as the world believed that we were spending money in a way that would make even more money, be productive, then why wouldn't everyone keep lending money to us at a low interest rate?" And it kept working.
23:46 Speaker 02 People just bought American debt because it's a safe asset. And it turns out that as people were becoming wealthy all over the world, in particular, oil-producing countries, eventually China as well, you know, if you don't plan on spending that wealth domestically, you gotta do something with it. Like, it has to be in some form. And so the form it took... Was very often treasuries. So there turned out to be this seemingly inexhaustible demand for treasuries as a safe asset all over the world. So it turns out that one way of thinking of us right now is that we're the Saudi Arabia of money.
24:22 PJ Vogt? Meaning what? Like, they make all the oil, we make all the money?
24:25 Speaker 02 Yeah, to the rest of the world, treasuries are money, or at least until very recently. And so we have the luxury of producing as many of them as we care to. We just sort of kept on spending. We sort of quietly began selling more treasuries and then more treasuries and then more treasuries and then more treasuries.
24:41 PJ Vogt? So if you think of it as from sometime in the 80s until around now, while obviously there's exceptions and there's interruptions and we go through a recession, for the most part, America was a flush person who like Amex and Visa and Chase in the form of like Japan and China and lots of other countries. And like, American banks are all just like, please, please, please, we want to sell you credit. We want to take your debt. What are we spending all this money on? Like, what did we buy?
25:11 Speaker 02 Yeah, I think that's the most important question. So, you know, we could have decided, we have this unbelievable ability to sell safe assets to the world. We're going to make sure that we have an incredibly well-capitalized hospital system with endowments for every hospital. Or we're gonna, you know, run cable and then eventually broadband to every house in America. We're gonna pay for electrical transmission lines so we can move energy across the country. We could have decided to pay for assets that are productive, that actually generate new income and therefore guarantee that we're going to be able to collect new taxes in the future.
25:44 PJ Vogt? What did we do instead?
25:46 Speaker 02 We paid for wars and tax cuts and to mop up the consequences after bank failures.
25:54 PJ Vogt? I should acknowledge that the largest structural drivers of our debt for years have actually been social security, Medicare, Medicaid. But the wars and tax cuts and bailouts Brendan's talking about, they were big spikes that we never paid down. Just looking now at a chart of our debt, watching from the 2010s to now, the trillions accumulate, I feel a wooziness. The feeling of seeing a binge captured in raw numbers. What a credit card company might look at right before they cut somebody off. But nobody did cut us off. And now?
26:30 PJ Vogt? We get to the heart of the question that brought us here. Who exactly do we owe that money to? And what happens if our leaders, or really Donald Trump decides we're just not going to pay the bill? That's after some ads.
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30:21 PJ Vogt? Welcome back to the show. Chapter four, April 2025. We were here this week because listener Ronald Young Jr. had wanted to know two things, really. One, should he think about personal debt as different from federal debt? I had an answer to the first. Debt is pretty much debt. Federal debt is made up of bonds, treasuries. Treasuries are just debt the US government sells. And like us individuals, the government relies on debt, on loans, to fund its future. Debt on its own, basically neutral. But the federal debt? Ronald had also wanted to know who the government owed it to, and whether there was like, an international version
31:05 PJ Vogt? of a collections agency that might show up if one day we didn't pay it. So I did what you do when you still have questions. I called an additional expert on the economy.
31:17 Speaker 03 Hello.
31:18 PJ Vogt? Hi Noah, how are you?
31:20 Speaker 03 Not bad. Do you mind if I eat this bagel?
31:22 PJ Vogt? No, go for it. While you're not saying, I'm going to ask you some questions about debt and national debt, and that's it.
31:32 Speaker 03 Yeah. All right, let's do it.
31:34 PJ Vogt? Noah Smith, he writes a substack I read called No Opinion, N-O-A-H-P-I-N-I-O-N. He writes a lot about federal spending, federal debt. But I wanted to start with the brass tax. So how much is our national debt right now?
31:50 Speaker 03 I don't know, let me look that up. Hold on.
31:52 PJ Vogt? Yeah.
31:53 Speaker 03 To do, there is a debt clock that sort of keeps track of this. It has to make some estimates, you know, because you don't, doesn't know exactly the number. And the US national debt, it's about $36 trillion.
32:06 PJ Vogt? Are you on USDebtClock.org?
32:10 Speaker 03 No, I'm on the Joint Economic Committee of the Senate.
32:12 PJ Vogt? Okay, because the site I'm on looks like it's going to steal my credit card. Yours sounds better.
32:17 Speaker 03 Yeah.
32:18 PJ Vogt? Okay, so you said it's how much?
32:19 Speaker 03 $36 trillion. That's $36 million million dollars.
32:24 PJ Vogt? How am I supposed to feel about that number?
32:27 Speaker 03 I don't know.
32:28 PJ Vogt? How do you feel about that number?
32:30 Speaker 03 I think that this number is a lot. So one way of looking at it is you could compare it to income. So the annual income of the United States economy is about $30 trillion.
32:41 PJ Vogt? Noah did some napkin math for me. Our national debt is 1.2 times our GDP. That $30 trillion figure. Meaning, our debt is 1.2 times all the money made in America this year. By companies, by people, you, me. The money a search engine makes when you subscribe to our podcast's premium feed in cognitomode. That is a tiny little piece of GDP. Another way Noah said you could think about this is just in terms of tax revenue. That's the main way our federal government raises money for itself. And the national debt is equivalent to seven years of our tax revenue. As spoke the poet Borat, wah-wah-we-wah.
33:21 PJ Vogt? What would happen if, in a large way, we started not being able to make those payments?
33:28 Speaker 03 So a sovereign default would be an economically catastrophic event for a number of reasons. The main reason is that the entire financial system holds a bunch of treasury bonds as if these are risk-free assets. In other words, they believe so strongly that the government will pay them back that they've based a lot of their financial models around this assumption. So if you have a sovereign default, what happens is that every bank in America will become insolvent overnight. And many of the banks around the world will also become insolvent overnight. What an insolvent bank means is it means that its liabilities exceed its assets. The amount of money it owes exceeds the amount of money that it has able to pay back.
34:10 Speaker 03 When you have an insolvent bank, it's completely vulnerable to a run on the bank. People pulling out their money and trying to put it in cash, which people immediately will, because if you have an insolvent bank, you want to get your money out before other people do. So what happens is that the banks in the United States collapse. And if the banks in the United States collapse, so we had a near collapse in 2008. And you remember the economic devastation that resulted from that, right?
34:33 PJ Vogt? Yes.
34:34 Speaker 03 Right, so we have that, but worse.
34:36 PJ Vogt? I should say here, the place Noah's scared we could go, we've never been there before. So everything he's saying- Is his best guess. It could go differently. Maybe some banks would survive. Maybe the Fed would step in and prevent some damage. But he's certainly directionally right. Like, we are talking about living in a house on fire. The best version of which would be worse than anything that's happened to the American economy in our lifetime.
35:03 Speaker 03 So 2008, but worse, bank lending to companies stops. Companies stop investing.
35:10 Speaker 03 They lay off massive amounts of workers. Unemployment goes really high, let's say 20% or more. And our GDP, our national output, goes down by, rough guess, 20%. So we get 20% poorer. Massive unemployment, economic devastation, huge numbers of businesses fail.
35:31 Speaker 03 It's just, it's terrible.
35:32 PJ Vogt? Okay, here's a, here's like a meta question for you. All right, like, when you're, when I was a kid, sometimes I would get worried about really hypothetical things that didn't actually matter. Like, what if I forgot to remember how to breathe? Or what if the things I'm saying, other people are hearing other things than their things they're saying, like, I'm hearing other things? As somebody who thinks about the health of the economy and cares about risk to it, does asking about the national debt feel like a besides the point? Who cares? We're not going to stop breathing question? Like, where does it actually? No, it feels like a real question.
36:06 Speaker 03 It's a big, yeah, it's important. And it's starting to become very worrying.
36:10 PJ Vogt? There's two reasons Noah's worried. There's the size of the debt, which we've talked about. But there's something else. The interest rate. We're constantly paying off our old bonds by issuing new ones we borrow to pay off our loans. Economic historian Brendan Greeley, he'd explained that part of the reason America started borrowing more was that interest rates stayed so low that it was almost like the loans were free. But Noah says that that was a dangerous thing for people to get used to.
36:39 Speaker 03 The people who said that debt was safe in the 2010s
36:44 Speaker 03 may have taken that too far. So if our government needs to borrow to do stuff, it's good to borrow when interest rates are low.
36:50 PJ Vogt? Yes.
36:51 Speaker 03 But at some point, you should pay it back because interest rates won't stay low forever.
36:56 PJ Vogt? And we did not.
36:57 Speaker 03 We did not. And so the thing we borrowed to do in the 2010s was to help get ourselves through the Great Recession without unemployment going higher. It was a lot. It was a lot. It didn't quite double our debt, but it almost did.
37:10 PJ Vogt? Yeah.
37:10 Speaker 03 And so we borrowed that, and we should have started paying it back as soon as the economy improved. But we didn't. Instead, we did things like tax cuts and increased spending. We didn't start paying it down.
37:24 PJ Vogt? So Noah's answer harmonizes with Brendan's. They both tell a story about a country whose debt became, in a way, too valuable, or a country that grew too reliant on borrowing. But Noah adds an additional wrinkle, which explains why the present moment specifically is so scary. The interest rate on our debt, it doesn't just go up at random. It reflects a lot of things. A big one is, does the rest of the world trust us to pay them back? Everything Trump has done to freak Wall Street out, to make you not want to look at your 401K or your stocks or your crypto account or whatever, the rest of the world feels the same way. This $36 trillion we owe, a lot of that is to American institutions,
38:07 PJ Vogt? banks, pension funds, even citizens. But about 30% of our publicly held debt is owned by other countries.
38:16 Speaker 03 Japan owns the most. So Japan owns about $1 trillion of our debt. China is number two. UK is number three. Luxembourg is after that. That's just the EU owning our debt. Cayman Islands, that's like fake. That's like a bunch of financial engineering bullshit. Then Canada, Belgium, Ireland, France, Switzerland, Taiwan. So Europe and Asia are the main ones.
38:36 PJ Vogt? And these are, many of these countries are places that we are picking a fight with right now.
38:40 Speaker 03 All of them. We picked a fight with all of them at the same time.
38:44 PJ Vogt? So if they, is there a world where they like hate cell just to screw us over?
38:49 Speaker 03 Yeah. Well, I mean, I don't know. It's hard to differentiate. Empirically between hate and fear. So their hatred of what we're doing and their fear that we won't pay them back is not necessarily, I can't tell you how much of one and how much of the other.
39:02 PJ Vogt? Yeah.
39:03 Speaker 03 No one can. But yes, yes, absolutely. And you could argue that China is now doing this. China absolutely can do this to just spite us. China can be like, fuck you, we don't need you. You put tariffs on us, suck it.
39:16 PJ Vogt? Economically speaking, it turns out there's more than one way for China to say suck it. Yeah, there's all the tariffs China announced on American goods. But also, someone, or lots of someones, just sold a ton of American bonds. There's a huge sell off in the bond market.
39:32 Speaker 04 What on earth is going on here? There was a significant sell off. An ominous drop in US risk assets alongside the dollar and treasury.
39:39 Speaker 05 The US 10 year treasury, that peaked overnight at 4.49%.
39:43 Speaker 06 Well, no one really knows what then because it's never happened. And no one was to find out.
39:47 PJ Vogt? Noah suspects that the sell off could have been another way China said suck it. Although we don't yet have the data to know for sure.
39:53 Speaker 03 So someone out there knows, but then it's hard to tell who sells it until later they report how much they have. And so we don't know if they were the ones selling the other day. Probably they were, some of it. It's hard to know how much exactly was them, but yes, I think they did that the other day. I think that when Trump announced like 125% tariffs on China or whatever, I think China's like, well, screw you and started selling some of our bonds.
40:16 PJ Vogt? Do we own some of their bonds?
40:18 Speaker 03 Mostly no, we don't.
40:20 PJ Vogt? Feels like that was an oversight.
40:24 PJ Vogt? Times are grim in America right now. The future is uncertain. But at least I, a person who found out what a sell off in the bond market is 10 minutes ago, can make Noah Smith, an economist forced to explain that concept to me, occasionally laugh. Anyways, the people who did not vote for Donald Trump were worried about all sorts of things that might happen if he won. Despite those worries, I didn't see anyone predict this. One of America's great natural resources, I now know, was that other countries, even the ones who didn't love us, believed in our future so much that they treated our IOUs like they were a steady form of international currency. They gave us functionally an endless line of low-interest credit. And Trump has damaged that.
41:07 PJ Vogt? His strategy, if it's a strategy and not a personality, is to act crazy and pick fights. So now, fewer people want to buy our debt, which means the interest we pay on our debt rises. And as our debt gets more expensive to hold, a dark possibility appears, a remote one, but still. What if we were to default? What if America missed its payments? At this point, are there reasonable people who really consider the prospect of America actually defaulting on debt to be a real one? Or are we still kind of...
41:39 Speaker 03 I do.
41:40 PJ Vogt? You do?
41:41 Speaker 03 I do. I do. I think there's a real possibility that we will default on debt.
41:46 PJ Vogt? And why do you think that?
41:48 Speaker 03 Because I think when you look at how Trump does business in his personal business dealings, it's consistent with his personal pattern. So Trump, when his businesses are in trouble, be it a casino, a property development, commercial building, he would always do two things, right? He would look for a bailout. He would look for someone to give him a bunch of money, an infusion of cash, okay, to keep him going.
42:10 PJ Vogt? Yeah.
42:11 Speaker 03 Or he would declare bankruptcy. And Trump has declared bankruptcy many times. It is Trump's instinct to say, oh, I don't have to pay you back that debt? Well, I'm just not going to. That is his instinct in business. And now that he's running the federal government like he runs one of his businesses, you know, art of the deal, I think the first thing he'll do is look for the Federal Reserve to bail him out and print money to reduce Treasury yields. I think that's the first thing he'll do. And then if that doesn't work, or if it causes really high inflation and everybody's mad about it, or if that doesn't go right, then I think that the next thing he'll do is look around for a way to default on the US debt. So I don't know that that means we will default. I still think it's less likely than 50% that the United States will default, obviously.
42:54 Speaker 03 But I see it reasonably likely that Trump talks about default and starts publicly floating this as an option. And I think that at that point, people start getting scared and yields will go up more. And there's a chance that this could become a runaway self-fulfilling prophecy where Trump talking about default scares people so much that they all take their money out of US bonds and then we have to default.
43:15 PJ Vogt? Have you ever felt this way as someone who tries to understand the economy before?
43:20 Speaker 03 Never, not even close. I've never seen someone intentionally smash the American economy like this. It's never happened.
43:28 PJ Vogt? So Noah Smith, not a panicky writer by disposition, is looking at the horizon with some concern. Brendan Greeley, the person who told me the history of debt in this country, he too is worried about our future. And so what are you, what are you doing? Like, what, how do you think about just like, as a human being living in a country that might be facing something really perilous? Like, are you stockpiling gold and shotguns and promissory notes? Like, what do you, what do you do?
44:00 Speaker 02 The situation in which treasuries are called into question is so catastrophic that I don't know that there is a hedge against it. I sort of, I always get angry at very wealthy people who buy places in New Zealand or Canada where they can live off the land as a plan B. Because my plan B is continuing to fight for a functioning democracy that makes good choices, because we don't really have any other options.
44:30 PJ Vogt? Yeah.
44:31 Speaker 02 So I think important people in America who have Trump's ear pay attention to the price of treasuries, pay attention to yields, the sort of imputed interest that America has to pay on, on treasuries. And so I think it is far more likely that people will say, look, you cannot call treasuries into question. We'll give you all sorts of latitude to do all sorts of horrific things, but that one you don't get to mess with. But if we go back to your initial question about, you know, does America just have a credit card like normal people? I, I think it does. Not everybody who studies this agrees with that, so I want to make sure that this is not like a statement of fact, but it is an interpretation that I agree with.
45:13 Speaker 02 And I think that in our own lives, this makes sense, because when you have a friend who's in debt, you don't just care about the amount of debt, you care about like, what did they buy with it?
45:23 PJ Vogt? Yeah.
45:24 Speaker 02 So if they bought like, a trip to Ibiza and a jet ski, like, you're probably worried about your friend. But if they took out a small business loan to start a bakery, and they're at the bakery every morning at three, putting the dough in the oven, you're probably not worried about them. They're doing something productive with that loan. Ibiza and jet skis is not productive.
45:46 PJ Vogt? Yeah.
45:46 Speaker 02 And so eventually, you know, if you can continue to create productive assets, you know, help encourage the economy to expand in a way that will continue to bring in taxes, you could roll over this system indefinitely. It is a big country, full of smart inventive people who want to do new things that will bring in taxes. I do worry, and I'm a little sad, that a lot of what we spent on, when we had, for a time, an unlimited ability to borrow, you know, we spent it on the government version of Ibiza and jet skis.
46:21 PJ Vogt? Yeah.
46:22 Speaker 02 And we're looking back at that. And you asked, like, what do we do from now? How do we fix this? PG, I don't think we can. In the same way that like, if you have a friend who goes bankrupt, like, you know, they just sort of, they have to live quietly and deliberately for a while. And I think that all those hard choices that we've been avoiding, the most likely outcome, if for some reason the treasuries were called into question, we'd have to have those conversations about things we've been avoiding.
46:50 PJ Vogt? So the answer, it turns out, to the question of when we should start worrying about the national debt or the interest rate on our treasuries, unfortunately, maybe sometime in the past. But as things change, it's good to know whether America still looks like a country that pays people back. And if you want to know that, there's a number. 10-year treasury yields, as I write this Thursday night, are at 4.3%, lower than during the sell-off, higher than last November. A new number to check on my phone when I feel worried. Just what I was looking for.
47:28 PJ Vogt? Brendan?
47:29 Speaker 02 Thank you.
47:32 PJ Vogt? So fun to think about this stuff.
47:34 Speaker 02 Is it fun?
47:35 PJ Vogt? You know, it is perversely fun. As, I mean, it's not fun. It's like a very scary feeling, but like, I don't know. I just feel like it's always better to try to understand than not.
47:46 Speaker 02 Yeah. I think so. I think theory is catching up to reality, and reality is going to be painful.
47:54 PJ Vogt? Well, thank you for talking to me about this.
47:56 Speaker 02 Yeah.
48:04 PJ Vogt? Brendan Greeley, he's working on a book about the history of the dollar. And you can find Noah Smith online at his Substack, Noah Opinion.
49:22 PJ Vogt? Search Engine is a presentation of Odyssey and Jigsaw Productions. It was created by me, PJ Vogt, and Trudy Pinamaneni. Our senior producer is Garrett Graham. This episode was fact-checked by Mary Mathis. Theme, original composition, and mixing by Armin Bazarian. Additional production support on this episode by Kim Kupel and Sean Merchant. Special thanks this week to Alex Blumberg. If you'd like to support our show, we could use it, and get ad-free episodes, zero reruns, and the occasional bonus audio, please consider signing up for incognito mode. You can learn more at searchengine.show. Our incognito mode listeners recently got a big discount on our merch, which will be arriving in the next couple of weeks.
50:03 PJ Vogt? Also, if you have time, you can rate and review us on Apple Podcasts. Because of the wonders of the algorithm, it helps people find the show. It's not the system I designed, it's the system I live in. And we read the reviews and learn from them. Our executive producer is Leah Reese Dennis. Thanks to the team at Jigsaw, Alex Gibney, Rich Pirello and John Schmidt, and to the team at Odyssey, Rob Morandi, Craig Cox, Eric Donnelly, Colin Gaynor, Nora Curran, Josephina Francis, Kurt Courtney and Hillary Schuff. Our agent is Orin Rosenbaum at UTA. You can follow and listen to Search Engine for free on the Odyssey app or wherever you get your podcasts. Thanks for listening. We'll see you in two weeks.
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