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Donald Trump is Wrong About the National Debt (Again)

Here’s a very inaccurate comment by Donald Trump from yesterday:

“Now, if you look at the stock market, that’s one element, but then we have many other elements. The country — we took it over, it owed $20 trillion, as you know, the last eight years they borrowed more than it did in the whole history of our country, so they borrowed more than $10 trillion — and yet, we picked up $5.2 trillion just in the stock market, possibly picked up the whole things in terms of the first nine months in terms of value. So, you could say in one sense we are really increasing values, and maybe in a sense we are reducing debt.”

Alrighty guys. You know I am a stickler for accounting so let’s sort this out. When the value of the equity market rises the value of debt does not necessarily change. Remember, equity is the residual of assets minus liabilities. The market value of the stock market is not the book value of assets minus liabilities, however. It’s basically a future estimate of what that book value will be worth in the future and people bid on that hoping to benefit from the future value add of corporate America. But the key point to remember is that you cannot logically say that the debt was reduced because the stock market rose in value. They are two separate balance sheet items that should not be confused for one another.

Now, I totally understand what he’s trying to say. He’s trying to say that our net worths have increased so we’re actually better off despite the rise in debt. That’s technically correct. But what he’s leaving out is that $5.2T isn’t really that much in the grand scheme of things. After all, private sector net worth increased by $50.7T from 2009-2017 while the national debt increased by $8.7T. That’s 10X more than the increase we’ve seen under Trump.

Now, I don’t like to play politics here, but we have to remain balanced when we talk about these things. The Trump stock market rally has been impressive and frankly, unsurprising as I said on election night. But you can’t talk about the national debt without putting the entire balance sheet into perspective and Trump has a history of taking these things out of context to make a political point. And while correlation is not causation it is undeniable that the private sector is much better off today than it was in 2009 despite the increase in the national debt.¹

It would be nice if all of these conversations could be a bit more objective rather than always turning into political charades. And that’s part of what makes economic and financial analysis so painful at times. There are so many competing political narratives trying to infect our biases that it’s hard to look at things and remain really objective.

In sum, the stock market rally under Trump really has helped private sector balance sheets despite an increase in the national debt during the same period. But the same was true under the Obama administration. And here we are still solvent as ever and in fact, arguably more solvent than ever. That’s the nice thing about accounting – no matter how much you want to believe this or that political party the numbers tell the objective truth.

¹ – This doesn’t even touch on the perennial blame game we play with the national debt while ignoring the fact that most of the increase from 2009-2017 was not discretionary spending, but a simple result of a collapse in tax revenues (due to recession) and a surge in non-discretionary spending due to automatic stabilizers.