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How The National Debt Impacts Your Income And Retirement

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How The National Debt Impacts Your Income And Retirement

The United States’ national debt level is often a subject of controversy. But given the fact that there’s a $1 trillion budget deficit for the past four consecutive years, which has pushed the national debt to more than 100 percent of the GDP (gross domestic product), it’s clear to see why people are starting to pay close attention to this issue nowadays. Sadly, the way in which this was explained to the public is a bit obscure, plus a lot of individuals cannot even comprehend how the national debt could affect their everyday lives. This is exactly the reason why this topic has become a favorite topic for discussion and confusion. Click Here To Go Straight To Our Online Tutorial

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Federal Reserve Building, Washington DC, USA

National Debt vs. Budget Deficits

First of all, it’s important that you understand the difference between the federal government’s annual budget deficit and the federal debt. To put it simply, the federal government produces a budget deficit every time it pays out more money than the amount of income it receives from an individual, corporate, and excise tax. For the government to continue its operation, the Treasury Dept. will need to issue treasury notes, treasury bills, and treasury bonds to compensate for the difference. It finances the deficit by borrowing money from the public. This includes borrowing from foreign and domestic investors, including corporations.

By releasing these securities, the Federal government will end up acquiring cash that they can use to pay for the governmental services. The national or federal debt is basically the net accumulation of the annual budget deficits of the federal government. It’s the amount of money that the US government owes to the creditors. For analogy, the fiscal deficits are trees, while the federal debt is the forest.

The government’s borrowing of money to pay-off the national deficit can also come in other forms, such as issuing financial securities and borrowing from International organizations, such as the World Bank and the private financial institutions. Because it’s borrowing money from a national or government level, it’s also known as the federal debt, government debt, national debt, or public debt.

The overall amount of money that the government can borrow without any authorization from the Congress is termed a public debt but subjected to certain limitations. Any amount that will be borrowed beyond the limit set will need approval from the government’s legislative branch.

Public debt is computed every day. After the reports are received at the end of the day regarding the total securities redeemed and sold, the Treasury will compute the overall public debt outstanding and is then released on the following day. This represents the total of both marketable and non-marketable principal amount of securities, excluding the interests.

Applying the following five mechanisms can help to lower the national debt – debt restructuring, monetization of debt, reduced spending, increased taxation, and outright default. The process of the federal budget will deal directly with taxation and spending levels and will come up with recommendations for possible default or restructuring.

national debt

A Brief History of US Debt

Debt has long been a part of the United States’ operations. The first time that the government found itself in debt was in 1790, right after the Revolutionary War. From then on, debt has been fueled over the centuries as a result of economic recession, war, and inflation.

During the modern times, the US government has struggled with spending less than it can take for the past 60 years, which makes balanced budgets seem impossible. The level of the country’s national debt has significantly increased during the tenure of the then President Ronald Reagan. Subsequent US presidents have continued the upward trend.

On the website of the treasurydirect.gov, it was indicated that in the past two decades, the national debt of the United States has continuously increased. It has only paused briefly during the prime of the economic markets and the administration of President Clinton in 1990. It was during this time that the country’s level of debt has lowered down a bit.

Political disagreements regarding the impact of the country’s national debt as well as the method of debt reduction have led historically to the many holdbacks in Congress and delays in the proposal, approval, as well as appropriation of the budget. Every time the limit of debt is maxed through spending and as a result of interest obligations, the president will request from Congress for an increase of the limit rather than look for solutions to reduce national debt.

From the standpoint of the public policy, the public accepts debt issuance for as long as the proceeds will be used to encourage growth in the economy in a manner that can lead to the long-term prosperity of the country. But if the debt will be increased to fund the consumption of the public, such as using the proceeds for Social Security, Medicare, and Medicaid, using debt will not receive significant support from the public. If the national debt is going to be used for economic development, then the current generation and the future generation will end up benefiting from it. However, if the debt is going to be used to fuel consumption, this will only benefit the existing generation.

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Understanding the National Debt

Since debt plays an important part in the development of the economy, it should be appropriately measured to convey its long-term impact. However, evaluating the national debt of the country about the GDP, although it’s common, isn’t the best approach and this is due to various reasons.

First, GDP is difficult to measure accurately and is a very complex subject. Second, the country’s national debt isn’t paid with GDP. Instead, the tax revenue pays for it. Comparing the GDP to the country’s national debt is like comparing the amount of a person’s debt to the total value of the products and services they end up producing for their company in a year.

Utilizing an approach, which focuses on the national debt per capita, may be a much better sense of where the debt level of the country stands. Another approach that’s much easier for the public to understand is by merely comparing the interest expense paid for the national debt to the expenditures made on specific services by the government, such as defense, transportation, and education.

national debt growth by year

Is National Debt So Bad?

Policy analysts and economists tend to disagree on the consequences of having a federal debt. Certain aspects have to be agreed upon. Governments running fiscal debts need to make up these differences by borrowing funds, which will crowd out the capital investment within the private markets. The debt securities that the government issues to service their debts could affect their interest rates. This is one of the most significant relationships manipulated by the monetary policy tools of the Federal Reserve.

Keynesian macroeconomists are people who believe that it’s more beneficial to run current accounts deficit to boost the aggregate demand of the economy. Most of them support the fiscal policy tools, including the government’s deficit spending, but only after the monetary policy is proven ineffective and when the nominal interest rates reach zero.

Austrian and Chicago school economists often disagree about the debt-hurt private investments and the deficits, including the capital structure and manipulate interest rates, support exports, as well as harm future generations unfairly either through inflation or higher taxes.

Some of them agree that the debt of the government is irrelevant if the central bank is capable of printing limitless money, although this is such a minority view. History has proven that the government who abuse the printing press tends to suffer from inflation and this is the same fear that has kept policymakers from monetizing entirely on debts. So, the federal government will sell assets, keep on borrowing, increase taxes, and re-negotiate the terms to resolve the issues of debt.

national debt

What Goes into the Current National Debt?

As stated above, debt is the total accumulation of budget deficits. It’s important that the top of the expenses is looked up because these are the major factors that contribute to the national debt. Some of the United States’ major expenses are the following:

  • Healthcare Programs (Medicaid & Medicare) – $1.1 trillion often go to these programs, which include Medicaid and Medicare.
  • Social Security Programs – These are aimed at providing security to retirees, and it makes up $1 trillion of the total debt.
  • Defense Budget Expenses – This is the amount allocated for the national budget to spend on military-related operations. As of the moment, there’s a $1.1 trillion that is allocated for the United States’ Defense Budget.
  • Other – This includes veteran benefits, transportation, education, international affairs, training, etc. These are all expenses that the government has to pay for. A lot of people believe that the government tends to spend a lot of money on International Affairs, but in reality, this expenditure falls within the lower rank of the list.

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How National Debt Affects You

These are some ways on how you could be affected by the country’s national debt:

Higher Interest Rates – The federal government was able to benefit from the lower interest rates in the past few years, although experts have said that the benefit of smaller interest is not expected to last longer. The United States relies on foreign investments to pay more than 50% of its debt, and although most experts believe that those foreign investors will keep on buying Treasury bonds, they are not likely to do so in a generous term. Thus, consumers are going to be affected because the interest rates on the US treasury bonds are the benchmark for the various loan products in the country, including credit cards, mortgages, car loans, and student loans. As the interest rates increase to attract investors on Treasury bond, the interest rates for consumers will also increase.

Slow Economic Growth and Weaker Job Markets – If the interest rates will increase, a big portion of the government’s budget will be allocated towards payment for interests leaving only a few dollars for the others, such as tax incentives for small business and building roads, which are both contributors of the economic development.

Increase Taxes To Reduce National Debt – Most Americans would prefer to get more benefits than pay for it. However, experts believe that cutting government spending is just half of the solution. The government will eventually need to think about how they could increase revenue, and this could include increasing taxes.

Higher Inflation – Massive government spending during the wake of the country’s financial crisis puts pressure on the supply & demand dynamics. However, this has yet to trigger meaningful inflation, mainly because of the continued weakness of the corporate and consumer spending. However, when the demand returns from the private sector, additional competition could crop up for the limited supply of goods, and this will, in turn, lead to price increase. Inflation is bad for consumers since it corrodes their purchasing power and might eventually lead to lower standards of living. Those who save money in the bank may also feel the impact of the inflation rate, which will affect the yields on certificates of deposit, as well as other savings accounts.

national debt growth by year

Policies To Reduce National Debt

As the country’s national debt continuously grows, one question remains – is it okay to run a deficit, which we have been doing for many years or is there a need for the balance to be budgeted as to create solutions to the national debt?

Just like with the average household, overspending could drag on for a longer period as a result of the borrowing more money in what seems to be a never-ending game of chasing the tail. The US government has somehow become an expert when it comes to this. But without its spending, others would argue that the economy could become even worse than what it is now. For as long as the debt is used in the right way, it could help to foster the economy’s prosperity and long-term growth. However, higher levels of national debts in a longer period may also have a severe impact in the country’s overall economy.