I’m a middle aged dude with a family, own a house, have four kids, investments, all the adulting things.
However, I’m still not sure how a multi-trillion dollar national defecit seeps down to affect my day-to-day life
In: 492
A large national debt exposes the economy to risk.
The primary way the Federal Reserve combats inflation is by raising interest rates. The more debt a nation has, the harder it is to sustain high interest rates and the riskier this maneuver becomes.
Volcker was the Fed Chairman who managed to contain the inflation in the early 80s. He did so by raising the interest rates to an eye-watering 20%, with a solid 5 years above 10%. One of the key reasons he could do this is that the US debt to GDP ratio at the time was only about 25%. Let’s use a pessimistic napkin-math; if all the debt rolled over in those three years (which it didn’t) 20% interest on 25% of GDP means Volcker’s entire rate hike cost the US government at worst 5% of the annual GDP.
Compare this to where our current Fed Chair, Jerome Powell, is today. The peak interest rate Powell has taken us to is only 5.5%, but that’s probably about as high as he can go. The US Debt to GDP is currently about 100%, so if we made the same pessimistic assumption that all the debt turned over, the cost of Powell’s rate hike is also 5% of US GDP. However, Powell has only held interest rates up for 1 year (as opposed to about 5 under Volcker) and the current interest rate is 1/4th the peak Volcker got to.
The idea that all the Federal debt is going to turn over is a very pessimistic oversimplification, but it shows how much less space Powell has to maneuver relative to Volcker, and the majority of the difference is from the US holding roughly quadruple the national debt today than it did during the early 80s.
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