For as long as I’ve been aware, the United States has been over $20 trillion in debt. However, the US is still the richest country on the planet and manages to keep the vast majority of its people off the streets. And as far as I know, this number is only increasing with time. So then why does it even matter?
In: Economics
As long as the country can pay off its debt when it comes due, there isn’t much of an issue. The risk is that should the economy plummet to a point that when the bonds come due, the country doesn’t pull in enough revenue to pay for them, it would default on those loans, causing its credit rating to drop. This would lead to them having to raise interest rates to sell their bonds, thus more debt and more liability and less revenue for government-sponsored programs.
It only matters if a country is in danger missing a payment on that debt.
Debt is an important tool, it allows you to borrow money and build a bridge sooner and enjoy the economic benefits of that bridge sooner. If that benefit exceeds the interest on the loan, that is a win. It is pretty much the same as borrowing several times your income or net worth to buy a house.
In the case of the US, if it enjoyed $30 trillion worth of benefit from the $20 trillion of debt, they are coming out way ahead. When a country uses debt irresponsibly, like Venezuela or Greece, they don’t get any long term benefit out of it, and eventually reach a point where they are unable to repay that debt. They usually have to borrow more money to make their payments, and at that point the debt spirals out of control.
Manageable levels of Government debt are arguably a good thing. What’s important is that a government can’t be in a position where it cannot afford to pay it’s Bonds when they become due without needing to borrow excessive amounts of money or slashing all of it’s spending. This is what happened in Greece.
To put it into perspective the yearly budget of the US is 3.8 Trillion, while the debt is 22 Trillion. Yes 22 Trillion is a lot of money, but you have to take economy of scale into consideration. That’s comparable to a person that makes $50,000 a year owing $285,000 on a house. Which is just outside the 40% x 15 years rule. So it’s a bunch of debt but not excessive.
There’s actually an entire industry built around government debt. The Bond market and retirement industry. Most of the governments debt is owned by individuals and pension funds in the form of Bonds. A bond is a termed loan where the government agrees to borrow X amount of money for Y years and then pays it back at Z interest rate. These are considered a very safe investment (the US government is constitutionally obligated to pay its debts) and as such much of the US retirement savings and pension funds are heavily invested in US bonds. So government debt in that sense is a good thing.
Government debt is much more like corporate debt than personal finance. We keep being beaten over the head that personal debt is bad, and that’s where this idea of all debt is bad comes from. *Why does the government keep doing something that they tell us is a bad thing?*
Almost all the fortune 500 companies operate in debt, because borrowing money helps companies grow. When you talk about leveraged buyouts and corporate acquisitions these are almost always done with debt, few mega-corporations buy out companies in cash.
The government operates in much the same way. If they need money now to operate it’s easier to borrow than it is to get more money from taxes. Tax revenue fluctuates through the year so some months have less money coming in than others, so the government borrows to make up for shortfalls in the budget.
To be perfectly honest this is also a big part of the problem. Raising taxes and slashing spending is an easy way for politicians to become unpopular, while borrowing money isn’t seen the same way. That’s a big part of the reason the debt keeps getting bigger.
In a healthy state the government should borrow money to maintain programs and operations when the economy is low, and should pay back it’s debt when the economy is strong. Unfortunately that often doesn’t happen. The government has a tendency of borrowing heavily to pay for things like wars which rake onto the debt.
Government debt is fine when it’s well managed, but unfortunately more often than not governments fall into one of two categories. Left wing parties often spend too much on programs while not raising taxes enough, while the Right slashes taxes too much to incentivize business which put more of a burden on social programs and usually while running up military expenditures in the process.
Because the people you are indebted to *control you.* And the more debt you have, *the more control they have.*
Copying, pasting, and adding a few edits to my response to a similar question from earlier today.
When measuring debt burden, the most popular calculation is to compare a country’s debt to its GDP, since GDP represents the size of the economy and thus the taxable transactions that can be used to service its debt.
The [US debt-to-GDP](https://fred.stlouisfed.org/series/GFDGDPA188S) ratio is around 106% right now. This is historically very high–the highest it has been since shortly after World War II. By comparison, there are a few developed countries, with relatively stable economies, that have a [comparable or higher ratio](https://worldpopulationreview.com/countries/countries-by-national-debt/#undefined), but not many. Among them are:
* Japan has the highest in the world, at 237% of GDP.
* Italy is at 133%.
* Singapore is at 109%.
* Belgium, France, and Spain sit at around 100%.
Overall, the US is comparatively high, but not the highest and other countries are demonstrating that creditors are certainly willing to buy a country’s debt even if the burden is higher. But there are still reasons to worry about the debt.
**We are paying interest**–currently about 16% of the federal budget just goes to pay interest, and this at a time when interest rates have been very low for more or less 20 years. [Here](https://fred.stlouisfed.org/series/DGS5) is a chart of the interest rate on a 5-year treasury since the 1960s. Note how low interest rates have been for the past ~20 years compared with most of rest of the chart. If inflation and interest rates go up, the cost of interest will follow over time, even if we don’t increase the debt at all.
**Deficits are high during a strong economy**. In the past, deficits tended to drop during economic expansions because tax revenues increase. We should only see increasing debt (at least compared to GDP) during recessions. Last year we had close to a $1 trillion deficit even though the economy was very strong. During the next downturn (which, by the way, has almost certainly started because of COVID-19) our deficit is going to explode.
**We aren’t going to be able to pay this one down as easily as the last time**. In WWII, our debt/GDP hit around 120%, but after the war the burden quickly fell. This is because we had ramped up spending to pay for the war, but then the war ended and all that extra spending went away. At its peak in 1945, [nearly 90% of the US Federal spending was for the war](https://www.whitehouse.gov/wp-content/uploads/2020/02/hist_fy21.pdf). (Table 3.1) Today, our entire defense budget is only [15% of the Federal budget](https://upload.wikimedia.org/wikipedia/commons/3/39/US_Federal_Budget_Comparison_2016_vs._2015.png). Even if we cut *all* defense spending we would still be running deficits. This is because most of our Federal budget now goes to entitlement spending. The reason this is a problem is that, politically, its nearly impossible to cut entitlements. Europe tried it 10 years ago and the result was massive protests and riots. Instead, we are paying more and more for entitlements every year.
Eventually we are going to have to cut benefits and/or raise taxes (including for the middle class), but we are going to keep putting it off because no one has the will to do it today. Therefore the problem will continue to snowball and when our credit rating finally forces us to do something, the pain will be significantly worse.
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