What Can the US National Debt Tell Us About Our Future?

What can High Debt Cause?

To start off, we will look into how the high US debt can have some impacts to everyday life and life after you are gone.

Economic Impact

One of the primary concerns associated with a high national debt is its potential impact on the economy. As the debt increases, so does the interest payments on that debt. This means that a larger portion of the federal budget is allocated towards paying off interest rather than investing in public services or infrastructure. Additionally, a high national debt can lead to higher taxes, inflation, and reduced economic growth.

According to the Bradford Tax Institute, the most recent tax increase was set between 2013 and 2017 where the highest income tax rate was increased to 39.6 percent.

Burden on Future Generations

The national debt is essentially a burden that is passed on to future generations. As the debt accumulates, it becomes increasingly challenging to pay it off without imposing significant financial burdens on future taxpayers. This can limit economic opportunities for the next generation and hinder their ability to invest in education, healthcare, and other essential services.

Dependence on Foreign Investors

Another aspect to consider is the reliance on foreign investors to finance the national debt. The US government often issues Treasury bonds and other securities to raise funds, and a significant portion of these are purchased by foreign entities. This dependence can have geopolitical implications and potentially compromise national security if foreign investors decide to reduce their holdings or demand higher interest rates.

To put into perspective, 63 percent of the US is privately owned compared to Africa at 36 percent. With America having the highest direct foreign investment. Most of this is due to the US dollar being the most traded currency in the world.

Impacts Interest Rates

The level of national debt can also influence interest rates. When the debt is high, investors may demand higher interest rates on government bonds to compensate for the increased risk. This can trickle down to affect consumer borrowing rates, making it more expensive for individuals and businesses to access credit. Higher interest rates can slow down economic growth and hinder investment in the long run.

Policy Constraints

A high national debt can limit the government's ability to implement certain policies and respond effectively to economic crises. With a significant portion of the budget allocated to debt servicing, there is less flexibility to invest in areas such as infrastructure, education, and research and development. This can hinder innovation and long-term economic growth.

We have seen many cases when the US government proceed with federal government shutdowns to help pay down debt. The last was between December 22, 2018 to January 25, 2019 which lasted 35 days.

What is the US doing to combat High Debt?

As of now, the US debt is at $33 trillion, while last year it was at $31 trillion, which means on average every person in the US is $100,000 in debt. Consistently we have seen the US debt increase year over year, at this point, we can assume that it will continue to increase indefinitely. Now with all of this talk of the impacts of debt, you may be wondering what has the US done to combat this issue.

Fiscal Policy Adjustments

Policymakers can use fiscal policy tools to manage the national debt. This includes adjusting tax policies and government spending to achieve a balance between revenues and expenditures. Implementing policies that lead to budget surpluses can help reduce the debt over time.

Economic Growth

Promoting sustained economic growth can contribute to higher tax revenues and, in turn, help manage the national debt. Policies that support innovation, productivity, and job creation can have positive effects on economic growth.

With the widespread use of AI for art and writing, we can see more computer assistance running the world creating time for individuals to move forward with new innovations. As long as this technology is used correctly, we can see larges jumps in creativity to hopefully push up Economic Growth.

Entitlement Reform

Addressing the long-term sustainability of entitlement programs, such as Social Security and Medicare, is a critical aspect of managing the national debt. Adjustments to these programs, such as raising the retirement age or implementing means-testing, could help control future liabilities.

An example would be how retirement age has changed over time with it being at age 65 before 1937. Now it has increased to 67, with the trend increasing over time, we can assume it will increase in the future.

Spending Prioritization

Policymakers can prioritize spending to focus on essential programs and services while finding ways to streamline and cut less critical expenditures. This involves making tough decisions about budget allocations and eliminating or consolidating programs.

Debt Reduction Plans

Implementing specific debt reduction plans can involve setting targets and timelines for reducing the national debt. Bipartisan efforts and long-term plans that span multiple administrations may be necessary to achieve significant debt reduction.

Unfortunately, debt reduction has been on a halt due to inflation being at the highest it has ever been in the last 40 years. Due to inflation, it's hard for the government to gauge how much should be budgeted because the price of certain services fluctuates uncontrollably. Fortunately enough, we have data showing that inflation has been calm in the past 40 years and has since started decreasing this year as well.

Interest Rate Management

The government's interest payments on the national debt are influenced by interest rates. Managing interest rates effectively can help control interest costs. However, this is often influenced by broader economic factors and the actions of the Federal Reserve.

Between the 1970s and 1980s, interest rates for mortgages hit 9%-11% consistently. After those times, rates have decreased to better levels at 4%-5%, Interestingly enough we are seeing %8 interest rates which don't look like they will be settling soon.

Investment in Productivity and Infrastructure

Making strategic investments in areas that enhance productivity and infrastructure can contribute to economic growth. These investments can have positive effects on the overall economy, potentially improving the government's fiscal position.

Conclusion

The US national debt is a complex issue with far-reaching implications for the future. While it is essential to address the debt and work towards reducing it, it is equally important to balance fiscal responsibility with investments in key areas that drive economic growth. By understanding the impact of the national debt, policymakers and citizens can make informed decisions to ensure a prosperous future for the United States.