A reader asked recently, “What is national debt? It seems both complex and simple. How will it affect the future?”
Indeed, the US national debt is a complicated issue and this is evident in how the nations top economists continue to debate the significance of our debt and its impact on the nation. As the US national debt continues to swell, many people are seeking to understand the issue better. Here are some basic principles and strategies that should set your foundation for understanding the subject.
Types of US Debt
The US national debt can be looked at in two main ways.
First is the “public debt.”
- Public debt can be viewed as the actual amount of money the US owes through loans to individuals, groups, and governments.
- This is what the government pays interest on right now.
The second type is “gross debt.”
- Gross debt includes future obligations like Social Security.
- Although future obligations may be covered by future taxes, current tax rates will not bring in enough revenue to cover them.
Today’s public and gross debt levels relative to the size of the US economy (GDP) are higher than they have been since WWII. This has happened since the Iraq invasion around 2003 and can be largely attributed to the post 9/11 economy and recent “Great Recession.” Entitlement spending (Social Security, Welfare, Medicare) has also had a significant impact on the rising gross debt as population growth has slowed and the ratio of people on entitlement programs to those paying for it has increased.
How the US Debt Will Impact Us
As obligations increase, the US government must continue to raise interest rates so that investors are willing to loan the US money. Alternatively, taxes must increase across the board. Either scenario can be harmful to the economy and thus limiting job opportunities and people’s ability to spend effectively. This creates a few potential problems.
- As the US government increases interest rates to raise more money, investors may move money out of corporations leading to more government power and inflation.
- As interest obligations to debt holders increase, taxes are no longer used to improve the country but instead go to other nations.
- If a decrease in infrastructure programs happens before a decrease in entitlement spending then taxes become less and less an investment in economic growth and more of a temporary solution to support those in need.
- American companies are considered more risky as the US debt increases causing prices to rise which creates inflation.
What You Can Do
As time passes, the US will either have to cut programs or increase taxes to pay for the problems. Simply increasing debt is not exclusive of these options since it will increase interest payments which decreases the amount of money going to programs. Even if the government never goes bankrupt, its power on the international scale will diminish slowly over time making living in the US less of an advantage. Here are some strategies you can consider to be prepared.
- Be thankful that you live in a great economy that provides you with many more advantages than other places. How many people honestly are completely independent from everything else? Even if our country one day fails us, we’ve been very blessed until now. You have to appreciate the benefits along with the losses.
- Get financially sound in case you’re required to live on less. Practice the basics like saving for an emergency, spending less than you make, and investing in yourself. For more frequent advice, read some good financial blogs like MoneyCrashers.com or ChristianPF.com
- Vote for politicians whom you believe will best spend your taxes for the good of the country. Tell your friends to vote for them too.
- Lose your dependence on money by giving some away and seeing it as a tool for other things. When possible, find ways to enjoy life and make a difference without needing lots of money.
- Look outside. Even when the stock market drops the sky is still blue (or gray but I don’t think there’s any relationship there).
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This post is featured in the Carnival of Personal Finance Edition #270.