Welcome To Trillionistan. Don't Get Comfortable

Consider the U.S. national debt. It crossed $35 trillion in July 2024. That is roughly 120% of GDP. The last time the debt-to-GDP ratio was this high was 1946, right after World War II. Back then, the economy was growing at 10% a year and the government ran surpluses for most of the next decade. Today, the economy grows at 2-3% and the government runs deficits of $1-2 trillion a year.

The math does not work. At some point, the bond market will force the issue. The question is when, not if.

Corporate debt is another story. U.S. nonfinancial corporate debt hit $13 trillion in early 2024. That sounds scary until you look at the assets. Corporate assets are $45 trillion. The debt-to-asset ratio is about 29%, which is actually below the historical average of 32%. Companies have been refinancing at lower rates and extending maturities. The real risk is in the lower-rated tranches, where $1.5 trillion of BBB-rated debt sits on the edge of junk status. A recession would push a chunk of that over the cliff.

The stock market is the third trillion-dollar story. The S&P 500 hit a market cap of $50 trillion in mid-2024. That is 1.8 times GDP, a level only seen twice before: in 2000 and 2021. Both times were followed by drawdowns. The concentration is extreme. The top 10 stocks account for 35% of the index, the highest share since the 1960s. If those names roll over, the index goes with them.

Trillionistan is a place where the numbers are too big to process. The trick is to stop looking at the nominal figure and start looking at the denominator. Debt relative to GDP. Valuation relative to earnings. Assets relative to liabilities. That is where the real story lives.

Peter C. Earle is an economist and senior fellow at the American Institute for Economic Research. He writes about macroeconomics, monetary policy, and financial markets.