Understanding Our Expanding National Debt and Its Effects

The national debt is something you hear about if you watch any of the endless news programs these days. Its growth has been a significant subject of controversy in U.S. domestic policy for a long time and the issue has become a huge “elephant in the room” that no one seems to have a resolution for.

Most of us could use a little help in understanding the national debt and how it affects us. Here are some of the details to make sense of it.

Given the amount of fiscal stimulus money that has been pumped into the U.S. economy over the past year and the new stimulus monies that will again be added in very soon, it is easy to understand why many people are worrying and paying even closer attention to this issue. So have you asked yourself the question:

How does the national debt affect you?

The General Public Usually Doesn’t Get It

Unfortunately, the manner in which the debt level is talked about makes it hard for the average citizen to really understand. It isn’t always clearly explained. We hear about it, sometimes see it in a headline, but we then go on and just fail to discuss it in any detail with anyone who actually understands it.

While we are willing to accept a few “stimulus checks” readily, we are left to wonder what exactly the ramifications of getting those checks will mean to us in both the short and long term.

But don’t blame yourself for not understanding it all. In reality, there is a constant battle that is being waged between both sides of the political spectrum in government about the national debt. Amazingly, each side can justify and explain why it is a panacea that can solve all of our problems, or on the other hand, why it just may be the end of our world as we know it!

Explanation of This Big Debt

The national debt is simply the amount of money that our government owes its creditors. It’s really no different than the debt you have with just one huge exception. You aren’t the one who decides when that debt gets bigger and if and when it will ever get paid off! That decision is left to your elected officials and you have to live or die with whatever they do and decide.

Basically, since the government almost always spends more than it takes in via taxes and other income, the national debt continues to rise and rise and rise. The majority of the national debt is issued in the form of government bonds, known as treasury bills.

The Debate in a Nutshell

The questions about the debt revolve around two positions:

  • Will excessive government debt levels impact economic stability with ramifications for the strength of our currency in trade, economic growth, and unemployment?
  • Is the national debt manageable and should people just stop worrying about it?

The Budget Deficit and Our National Debt

Don’t get confused about these two terms. The difference between them is fairly simple. Let me explain it this way.

Our federal government generates a budget deficit whenever it spends more money than it brings in through income generating activities, such as taxes. To operate this way, the Treasury Department has to issue treasury bills, treasury notes, and treasury bonds to make up the difference. By issuing these types of securities, the federal government can acquire the cash it needs to provide everyday governmental services.

The national debt is the net sum accumulation of the federal government’s annual budget deficits, year after year all added together.

To put it in perspective just a little bit more, the national debt back in 1990 (about 30 years ago) was just under $3 trillion. Today, the debt, as we speak, is over $28 trillion!

Do We Ever Have to Repay the National Debt?

The national debt theoretically has to be paid back with actual tax revenue. That was somewhat derailed just a couple of years ago when the Trump Administration decided to put through a massive tax reduction and that act alone has cut tax revenues dramatically. If you didn’t see that one coming, it’s because many times the language used by government regarding our debt is intentionally made confusing to the public.

For example, using an approach that focuses on the debt on a per capita basis gives a much better sense of where the country’s debt level stands. For example, if people were told the debt per capita is approaching $84,000, it is highly likely they will grasp the magnitude of the issue. However, if they are told the national debt level is approaching 130% of GDP (gross domestic product), the magnitude of the problem will not be properly conveyed. Who knows what our GDP is anyway?

Comparing the national debt level to GDP is akin to a person comparing the amount of their personal debt to the value of the goods or services they produce for their employer in a given year. There’s just no relationship to grasp.

How Does the National Debt Affect You

Given that the national debt has in recent years grown faster than the size of the American population, it is fair to wonder how this growing debt affects you and me. While it may not be obvious, national debt levels directly affect us in several ways.

First, as the debt per capita increases, the Treasury Department has to raise the yield on all new treasury securities it issues to attract new investors. When they do that, it reduces the usable amount of tax revenue available to spend on other governmental services because more tax revenue will have to be paid out as interest on the national debt.

That causes the kind of problem like the one we are facing right now. We want to pay for something like the rebuilding of the nation’s infrastructure. That act will now require further increases in the debt because current revenues are not sufficient without further borrowing.

A second reason is that as the rate offered on treasury securities increases, American corporations are viewed by other nations as being a higher risk. That causes new bonds to be offered with higher more expensive yields. When that happens, the corporations are forced to raise the price of their products and services to pay for those increases in the costs of those bonds. That affects us again as we have to pay more for goods and services that we buy from them and that results in inflation.

More Ways the Debt Hurts Us

The national debt affects the prices for new homes too. As the yield offered on treasury securities increases, the cost of borrowing money causes increases in the mortgage lending market. That is directly tied to short-term interest rates set by the Federal Reserve and the yield offered on treasury securities.

Increases in interest rates push home prices down as home buyers are unable to qualify for as large of a mortgage as before.

Finally, when the yield on U.S. Treasury securities is considered a risk-free rate of return, risky investments such as corporate debt and equity investments lose their appeal.

That will cause investment in their bonds and stocks to dry up because the dividends they offer will decrease. If that happens, it causes a reduction in the size of the private sector and fewer jobs.

The bottom line here is actually dangerous. If a country is in fear of defaulting on its debt, national debt can cause a real national security issue.

Final Thoughts

Over the past year, the national debt has been rising at an alarming rate. Of course, during this pandemic a major part of it all has been government action to help us deal with job loss and its related impact on our current economy. But then what about the after effects? The debt has doubled from $14 trillion in 2010 to $28 trillion today, and it is still climbing. The Congressional Budget Office has forecast that by 2051, our national debt will nearly double to be 202% of GDP.

The national debt level is one of the most important public policy issues. When debt is used appropriately, it can be used to foster the short- and long-term growth and prosperity of a country. However, the national debt must be evaluated in an appropriate manner, such as comparing the amount of interest expense paid to other governmental expenditures or by comparing debt levels on a per capita basis.

Do you worry about out national debt? Are you able to grasp how it can affect you today and tomorrow, not to mention your children and grandchildren’s futures? What can you do about it and what will you do about it?

Image courtesy of Sealy J – Own Work on Wikimedia via CC BY-SA 4.0

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