The Real Problem With Government Debt and How It Trickles Down to Your Finances
Written by
John Csiszar
Edited by
Carly Brashears
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Rising government debt levels have seemingly always been in the headlines. In recent years, U.S. debt levels have become political, with one side of the aisle often refusing to raise the debt limit unless certain concessions are made.
While this type of legislative and fiscal action may seem totally unconnected to the day-to-day lives of ordinary Americans, the truth is that the financial ramifications can directly trickle down to your own personal finances.
Here’s the current status of U.S. debt levels and how it can create problems for individual Americans.
Where Does the US Debt Stand?
The U.S. has been indebted since its very inception, borrowing $75 million to finance its war of independence. Today, the national debt actually exceeds the GDP of the entire U.S. economy, hitting $33.84 trillion. In the past few years, the national debt has risen dramatically due to increased spending on a number of fronts. Wars, the Great Recession of 2008, the coronavirus pandemic, tax cuts and stimulus spending have all added significantly to national debt levels.
Are There Governmental Ramifications of Rising Debt Levels?
Just as with American households, rising debt levels means the U.S. government has to spend more of its money on interest. The comparison isn’t exactly apples-to-apples, as the government can essentially borrow as much as it wants to pay its obligations, while individual Americans must pay their debt or face bankruptcy. But it is true that the government must pay more and more in interest, and that is money that could have instead been used on services for the American people.
Another potential consequence of rising national debt levels is that faith in the American financial system can fall. This is particularly true in light of the fact that political brinkmanship has brought the U.S. dangerously close to defaulting on its debt numerous times. Even the threat of this possibility can have a variety of ramifications, from rising interest rates to a falling U.S. dollar to a decrease in foreign investment.
How Can Rising Debt Hurt the Finances of Everyday Americans?
Rising U.S. debt levels don’t directly affect the daily finances of everyday Americans. But the widespread effects of high U.S. debt can affect them in aggregate. Higher U.S. debt gives the American government less flexibility because there are legislative limits on how much the government can borrow. This is why there has been so much talk in recent years over a “raising the debt limit.”
Essentially, if the government needs to borrow more money to pay its current obligations, it requires an act of Congress to raise that limit. If Congress doesn’t act, then the U.S. risks defaulting. This would cause tremendous ripple effects throughout the U.S. economy, including rising interest rates on everything from home mortgages to credit card and auto loan rates. That is the biggest effect Americans would feel on a personal level. But financial markets would also be roiled, hurting retirement plan values and individual financial wealth. A default would also reduce the standing of American debt in the world, potentially leading to a falling U.S. dollar and reduced foreign investment. All of these factors in combination could even trigger a recession, resulting in rising unemployment.
A high level of debt in and of itself isn’t generally a drag on the finances of individual Americans, even though it allows the government less fiscal flexibility and costs the country money that could instead be used for other purposes. But the real concern — and one that seems to be more and more of a possibility — is a U.S. default triggered by excessive debt levels. This would be catastrophic on both the macro and micro level, affecting both the U.S. economy at large and the finances of individuals as well.
Why Do Debt Levels Continue To Rise?
Lawmakers are having a tough time corralling rising debt levels for the same reason that many Americans struggle to get out from under credit card debt. Whether you are an individual or a government, there are only two real ways to pay off debt — either spend less money or raise additional revenue. Those are difficult options for individuals, but for governments, they are downright unsavory. Spending less money as a government means cutting benefits for Americans, such as Social Security payouts, or trimming essential spending, such as on national defense. Raising additional revenue means raising taxes, an equally unappealing option. That’s one of the main reasons why debt levels continue to rise.
One alternative to reduced spending or increased taxes is growing the economy at a faster rate. But boosting GDP can be hard to engineer without additional government spending and/or reduced taxes, both of which can exacerbate the debt problem in and of themselves.
Are There Any Solutions in Sight?
The solutions, as outlined above, are mathematically “simple” but politically difficult. It’s likely that the U.S. will always pay its bills, as representatives on both sides of the aisle don’t want to be responsible for a default. But Congress is generally reluctant to raise taxes and/or reduce spending. This will likely lead to continually rising debt levels, which some economists have said is unsustainable in the long run.
For the foreseeable future, the U.S. government can likely continue to roll old debt into new debt, perpetually finding investors to finance its operations. However, if debt-to-GDP levels get too high, investors will eventually sour on the financial status of the U.S. and will demand a higher return for their investments. This can push interest rates higher and create further financial problems for the U.S.
The bottom line is that barring a significant increase in GDP, it will likely take some level of financial belt-tightening in the form of reduced spending and/or higher taxes to find a way out of the situation.
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