Our national debt is rising at a spectacular rate. Every day brings new record highs - over 11.5 trillion dollars and still climbing. Americans are starting to worry about the national debt and with good cause. The national debt is now something close to 80% of GDP and there is no stop in site to the spending from Washington. If we don't do something the debt could become the next economics crisis!
Obama made promises to cut the deficit in half by the end of his first term, but with his spending record that is looking more and more unlikely. The table below is an excerpt from a Fox News article:
There are four primary reasons that a continually growing national debt of the size we currently have is a danger to our economy. First, when the government needs to sell new bonds to cover spending it has to get someone to lend those dollars. This means the government competes with other borrowers to attract investors' money. The government has many advantages here, because it has taxing power; the default risk and therefore interest rates on government debt are relatively low, but as the government's liabilities grow that begins to change. Investors will and currently are beginning to take note of the high debt to GDP ratio of the U.S. and they then demand higher interest to compensate them for the greater risk of lending more money. The higher interest rates paid by the government is a problem in itself (more on this later), but it also has a ripple effect. The interest rates on U.S. government bonds are used as "risk-free" benchmarks for a lot of other short- to long-term market rates. This means that as the government borrows more it puts upward pressure on interest rates and begins to slow economic growth and distort investment and saving even more. Over time this will result in reduced prosperity in America.
Second, a large percentage of U.S. government debt is held by other nations' governments. This has historically been true ever since the second world war because the U.S. was the major economic power and a very stable place to stash your money. It is also expected that other nations would hold dollars because of the dollar's position as the primary currency of international trade and would like to store those dollars in an interest bearing instrument like a bond. The only real problem of foreign ownership of U.S. federal debt comes from the sheer size of our liabilities and the foreign holdings. The U.S. economy is very sensitive to interest rates and the strength of the dollar. If a large group of foreign debt holders decided to dump their holdings all at once the result would be a sharply weaker dollar and sharply higher interest rates on U.S. bonds as treasury prices sank. Those rates would bleed over into broader market rates and choke the economy over time if the demand for treasuries continued to be weak. This limits our ability to protect our interests internationally because certain nations have a massive store of U.S. debt, like China. While such an action is unlikely and would have consequences for the other party it is possible and it ties our hands. This will become an even bigger issue as we continue to go hat in hand to the world to fund our government's operations. If suddenly no one would lend to the U.S. government all of our options are very bad. They range from printing money and spiking inflation to shutting down government services.
Third, as our debt grows it requires an ever larger proportion of our annual budget to just pay the interest on the debt. Interest on the national debt is now the fourth largest spending category after Medicare-Medicaid, Social Security, and defense. By 2050 many economists predict that Medicare, Social Security, and the interest on the debt will take up the whole budget! Obviously, the interest burden diverts resources from other programs and itself necessitates more borrowing in a vicious and self-reinforcing cycle. The biggest detriment to the U.S. economy comes from the large percentage of interest that is paid to foreign debt holders. That represents money collected by the government and shipped to other economies. It is a net wealth loss for the U.S. At least with domestic holders of federal debt the interest payments re-enter our economy as income to the bond holders. Once the debt reaches the point where we have to borrow just to pay the interest on the debt - then the U.S. government is nothing more than a giant ponzi scheme.
Fourth, it is a simple fact of economics and mathematics that no entity, not even the U.S. government, can borrow indefinitely and never have to pay it all back. At some point our economy will change or the global situation will change and the U.S. will be forced to balance its budget and pay down the debt. The more we borrow today the bigger the hole we dig for our children, grandchildren, and great-grandchildren. We are quite literally stealing prosperity from future generations. Future Americans will face higher taxes, higher interest rates, slowing economic growth, and a generally reduced standard of living when the time comes that we have to pay the piper. This reason implores us to fix our spending habits from a purely moral perspective.
Our national debt and continued over spending is a complex problem and in order to change it we will have to look at ourselves long and hard. We as individuals and families must decide to live within our means, be realistic about what the government and and should provide, and demand accountability. Only then will we ever get this spending under control.
Obama made promises to cut the deficit in half by the end of his first term, but with his spending record that is looking more and more unlikely. The table below is an excerpt from a Fox News article:
- $38 billion for the State Children's Health Insurance Program Reauthorization between 2010 and 2019
- $787 billion fiscal stimulus bill
- $75 billion homeowner stability program
- $125 billion "place holder" of additional financial stabilization funds (if needed)
- $22 billion for Cap and Trade program in 2020
There are four primary reasons that a continually growing national debt of the size we currently have is a danger to our economy. First, when the government needs to sell new bonds to cover spending it has to get someone to lend those dollars. This means the government competes with other borrowers to attract investors' money. The government has many advantages here, because it has taxing power; the default risk and therefore interest rates on government debt are relatively low, but as the government's liabilities grow that begins to change. Investors will and currently are beginning to take note of the high debt to GDP ratio of the U.S. and they then demand higher interest to compensate them for the greater risk of lending more money. The higher interest rates paid by the government is a problem in itself (more on this later), but it also has a ripple effect. The interest rates on U.S. government bonds are used as "risk-free" benchmarks for a lot of other short- to long-term market rates. This means that as the government borrows more it puts upward pressure on interest rates and begins to slow economic growth and distort investment and saving even more. Over time this will result in reduced prosperity in America.
Second, a large percentage of U.S. government debt is held by other nations' governments. This has historically been true ever since the second world war because the U.S. was the major economic power and a very stable place to stash your money. It is also expected that other nations would hold dollars because of the dollar's position as the primary currency of international trade and would like to store those dollars in an interest bearing instrument like a bond. The only real problem of foreign ownership of U.S. federal debt comes from the sheer size of our liabilities and the foreign holdings. The U.S. economy is very sensitive to interest rates and the strength of the dollar. If a large group of foreign debt holders decided to dump their holdings all at once the result would be a sharply weaker dollar and sharply higher interest rates on U.S. bonds as treasury prices sank. Those rates would bleed over into broader market rates and choke the economy over time if the demand for treasuries continued to be weak. This limits our ability to protect our interests internationally because certain nations have a massive store of U.S. debt, like China. While such an action is unlikely and would have consequences for the other party it is possible and it ties our hands. This will become an even bigger issue as we continue to go hat in hand to the world to fund our government's operations. If suddenly no one would lend to the U.S. government all of our options are very bad. They range from printing money and spiking inflation to shutting down government services.
Third, as our debt grows it requires an ever larger proportion of our annual budget to just pay the interest on the debt. Interest on the national debt is now the fourth largest spending category after Medicare-Medicaid, Social Security, and defense. By 2050 many economists predict that Medicare, Social Security, and the interest on the debt will take up the whole budget! Obviously, the interest burden diverts resources from other programs and itself necessitates more borrowing in a vicious and self-reinforcing cycle. The biggest detriment to the U.S. economy comes from the large percentage of interest that is paid to foreign debt holders. That represents money collected by the government and shipped to other economies. It is a net wealth loss for the U.S. At least with domestic holders of federal debt the interest payments re-enter our economy as income to the bond holders. Once the debt reaches the point where we have to borrow just to pay the interest on the debt - then the U.S. government is nothing more than a giant ponzi scheme.
Fourth, it is a simple fact of economics and mathematics that no entity, not even the U.S. government, can borrow indefinitely and never have to pay it all back. At some point our economy will change or the global situation will change and the U.S. will be forced to balance its budget and pay down the debt. The more we borrow today the bigger the hole we dig for our children, grandchildren, and great-grandchildren. We are quite literally stealing prosperity from future generations. Future Americans will face higher taxes, higher interest rates, slowing economic growth, and a generally reduced standard of living when the time comes that we have to pay the piper. This reason implores us to fix our spending habits from a purely moral perspective.
Our national debt and continued over spending is a complex problem and in order to change it we will have to look at ourselves long and hard. We as individuals and families must decide to live within our means, be realistic about what the government and and should provide, and demand accountability. Only then will we ever get this spending under control.
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