The U.S. national debt has reached a new record high of over $34 trillion, according to the latest data from the Treasury Department. This means the U.S. government owes more money than ever to its domestic and foreign creditors. But how did the debt get so high, and what does it mean for you and your wallet?
U.S. National Debt has now surpassed $34 Trillion PIC.TWITTER.COM/N5CV72FGHW
— Barchart (@Barchart) JANUARY 3, 2024
The Causes of the Debt
The main reason behind the soaring debt is the persistent annual deficits the U.S. government has been running for decades. A deficit occurs when a government spending exceeds its revenue from taxes and fees. To cover the gap, the government borrows money by issuing bonds and other securities, which add to the debt.
The COVID-19 pandemic has led to large deficits in recent years, prompting the government to introduce stimulus measures to support individuals, businesses, and state and local governments. In 2020, the United States recorded its largest-ever annual deficit of $3.1 trillion, equivalent to 14.9% of the country’s gross domestic product (GDP). GDP is the total value of goods and services produced in a country in one year.
The Consequences of the Debt
The national debt can affect the economy and everyday American life. Here are some of the possible effects of the rising debt on your wallet:
- Higher Interest Rates: When the government needs to borrow more money, it competes with other borrowers in the market, such as businesses and consumers. This can drive up the interest rates lenders charge to lend money, making borrowing more expensive. Higher interest rates can impact you in different ways. For example, they can increase mortgage rates, which makes buying a home more costly and complex. Additionally, they can raise the interest you pay for loans and credit cards, decreasing your disposable income.
- Higher Product Prices: The national debt can contribute to inflation and the general price increases over time. Inflation can erode your purchasing power, meaning you can buy less with the same amount of money. One way that debt can cause inflation is by increasing the money supply in the economy, as the government prints more money to finance its spending. Another way is reducing investors’ and consumers’ confidence in the U.S. dollar, which can lower its value and make imports more expensive.
- Increased Taxes or Reduced Spending: The government needs to manage its debt and avoid being unable to pay its obligations. To do this, it may need to increase the money it brings in or decrease the money it spends, or both. This could mean you and your family have to pay higher taxes, or less money could be spent on public services and programs that help you, like infrastructure, health care, education, and social security.
The Misconceptions of the Debt
The national debt is a serious issue. It needs attention and action. It’s also important to understand some common misconceptions about it. For example:
- It is not unusual for countries to have large debts. Most countries in the world have debt. Some countries have higher debt-to-GDP ratios than the U.S. For example, Japan’s debt-to-GDP ratio was 256% in 2020, the highest in the world.
- The U.S. does not have to pay off its entire debt at once. Instead, it has to pay the interest on its debt and the principal of the bonds that mature each year. If the U.S. can borrow at low interest rates and maintain a strong economy, it can service its debt and roll over the rest.
- The debt-to-GDP ratio is a more meaningful measure of the debt than the absolute amount. The debt-to-GDP ratio compares a country’s debt to its economy, showing its ability to repay. The U.S.’s debt-to-GDP ratio was 97% in 2020, below the critical threshold of 100% that some economists consider unsustainable.
Few Last Words
The national debt is a complex and nuanced issue affecting the economy and your wallet. It is essential to stay informed and aware of the debt’s causes, consequences, and misconceptions and to support policies and actions that can address it responsibly and effectively. Doing so can help ensure a more prosperous and secure future for yourself and your country.