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
In terms of government spending, nothing on its own. Having a high deficit or debt straight doesn’t matter.
The problem is if your government can continue making payments on interest from the debt. If they cannot, their credit will degrade, which will make getting loans to pay the debt more difficult, and ultimately will require some kind of austerity or a debt crisis will occur. In a debt crisis your currency becomes worthless, so high inflation, and as you cannot finance additional deficit spending you must implement more austerity. Austerity means that your economic growth decreases as government transfers, infrastructure projects, and pensions are reduced. These combined mean fewer people get their money and therefore aggregate demand decreases. This decreases revenue, which then decreases your ability to reduce the deficit, thereby mandating more austerity.
Austerity of this level isn’t something the American public, as an example, has ever had. Reducing spending while increasing taxes would mean you spend less, get less public services, and pay more in taxes. You end up in an economic death spiral until the IMF, bankrolled by western countries, bails you out. These loans require strings which theoretically improves your ability to grow your business community.
Overall though, if you pay interest, you’re fine.
If you meant trade deficits then the answer is kind of nothing in pure economic terms. Being a net importer of goods means you have a stronger finance sector and currency and allows you to focus on competitive exports.
An unexpected side effect – peace! The main two superpowers of the world (China and the USA) are in a debt relationship that would make war really awkward for them both.
First a small clarification – deficit is the annual difference between expenditure and income (if income is greater you have a surplus not a deficit). Deficit gets added to/surplus subtracted from the national debt.
The main effect it will have is that as the debt rises, more of the country’s revenue is needed to pay interest on it, reducing the amount available for spending elsewhere. Countries could prioritise debt repayment to decrease it, but the money has to come from somewhere and a lot of people would rather see it spent year-on-year on health, education etc. than what seems an abstract concept of “paying off debt” when they don’t see the impact or benefit as being significant to them, compared to increased spending elsewhere (or tax cuts).
What is important is what you did/do with that deficit and debt. It’s one thing to deficit spend for say much needed infrastructure spending when interest rate was 0 that improvement will pay off with future productivity increases that would cover 0% or low interest rates. But if you deficit spend on unproductive things like tax cut for the rich for them to squirrel away at Cayman Islands, then eventually chicken will come home to roost. Though for country like US who has control over its own currency and debt issued with its own currency, that could take long time.
Check out his link it shows the numbers live on a scoreboard. https://www.usdebtclock.org/
The national debt is your debt, and the unfunded liabilities are your liabilities.
I am going to give a perspective from my home country where you actually had government defaults.
1. The government can pay its debt by printing more money. This creates hyperinflation. Now all the hard saved money you have accumulated over many years will lose 10%, 20%, 50%, 90% of value in a single year. If you don’t have access to a bank, and many people don’t, means you have no means to even partially mitigate the hyperinflation. So your grocery basket will get smaller in size by the week given your wages are not being readjusted in the same proportion.
2. The debt interest can be paid by tax revenue. Thus you can increase taxes to pay for it. Debt is by definition borrowing money from yourself from future to use today. You may benefit from the government services provided by this debt (eg getting your pension paid), but your kids will have to deal with a higher income tax years in the future to pay the interest from the debt you incurred.
3. The government can decide not to pay its debt. You are fucked in a different way because no one will lend the government money. So they either have to offset that by printing money (again) or by cutting expenses, like your mom’s pension. And your dad may lose your job because the company he works for has some of its cash in government bonds which just got defaulted, therefore they don’t have the money for payroll and have to close business.
Oh, and in this case some people may support the office in the government, because after all they defaulted their debt with the “evil banks” who lended their money. Too bad they don’t know the banks money does not belong to Scrooge McDuck, it comes from your mom and pop savings account and your low yield investments. So you are fucked and your neighbors are applauding this. And they will ask you to lend them money because they lost their jobs.
There are a lot of complicated answers here. And surprisingly a lot of talk about how national deficits are not to be worried about.
I think that the “real world economic consequences” that you’re asking about are called inflation.
It squeezes everyone, but probably poor people the most.
If it gets out of control it obviously can be really bad times.
I see it differently than some of the comments here. Our 30 trillion dollar debt is a time bomb ticking away because of the connection between debt, debt payment, deficit spending, money supply and inflation.
Inflation is what will be your undoing because your income will never keep pace with the rise in prices and if the US enters an inflationary spiral your dollars will buy less and less and less.
On another tangent, if you have a mortgage, you don’t own your home. The bank owns it. Investments? Unless they are grounded in something that won’t lose much value like gold or other precious metals, your investments could wind up not being worth the paper they’re written on.
Stagflation is another serious concern that results from a weak, inflated dollar. It takes more dollars to buy the resources that are needed to keep the economy moving and growing (like oil, gas, electricity, micro chips, computers, food etc etc) so less is made or produced. Production across the economy lessens and lessens because inflated dollars buy less and less.
Additionally, when the dollar ceases to be the world’s fiat currency (“when,” not “if”) it will not be able to just print dollars to cover its debts. The threat that BRICS poses to the US has never been explained to the American people.
And remember: if you ask one question to 3 economists in a room, you’ll get 6 different answers. Economics is a social science with no more validity than psychology, sociology or political science. That being said, a huge national debt is a ticking time bomb.
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.
I like people are telling OP “don’t worry about it” and then the next sentence “the gov will just print money, which will lead to inflation”, like, that IS a real-world economic consequence.
Latest Answers