Given that the national debt has recently grown faster than the size of the American population, it is fair to wonder how this growing debt affects average individuals. While it may not be obvious, national debt levels directly affect people in at least five ways. First, as the national debt per capita increases, the likelihood of the government defaulting on its debt service obligation increases, and therefore the Treasury Department will have to raise the yield on newly issued treasury securities to attract new investors.
This reduces the amount of tax revenue available to spend on other governmental services because more tax revenue will have to be paid out as interest on the national debt.
Over time, this shift in expenditures will cause people to experience a lower standard of living , as borrowing for economic enhancement projects becomes more difficult. Second, as the rate offered on treasury securities increases, corporations operating in America will be viewed as riskier, necessitating an increase in the yield on newly issued bonds. This, in turn, will require corporations to raise the price of their products and services to meet the increased cost of their debt service obligation.
Over time, this will cause people to pay more for goods and services, resulting in inflation. Third, as the yield offered on treasury securities increases, the cost of borrowing money to purchase a home will increase because the cost of money in the mortgage lending market is directly tied to the short-term interest rates set by the Federal Reserve and the yield offered on treasury securities. Given this established interrelationship, an increase in interest rates will push home prices down, because prospective home buyers will no longer qualify for as large of a mortgage loan since they will have to pay more of their money to cover the interest expense on the loan they receive.
The result will be more downward pressure on the value of homes, which in turn will reduce the net worth of all homeowners. Fourth, since the yield on U. Treasury securities is currently considered a risk-free rate of return, and as the yield on these securities increases, risky investments such as corporate debt and equity investments will lose appeal.
This phenomenon is a direct result of the fact it will be more difficult for corporations to generate enough pre-tax income to offer a high enough risk premium on their bonds and stock dividends to justify investing in their company. This dilemma is known as the crowding out effect and tends to encourage the growth in the size of the government and the simultaneous reduction in the size of the private sector.
Fifth, and perhaps most importantly, as the risk of a country defaulting on its debt service obligation increases, the country loses its social, economic, and political power. This, in turn, makes the national debt level a national security issue. The national debt level is one of the most important public policy issues. When debt is used appropriately, it can be used to foster the long-term growth and prosperity of a country. However, the national debt must be evaluated in an appropriate manner, such as comparing the amount of interest expense paid to other governmental expenditures or by comparing debt levels on a per capita basis.
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Your Money. The change in federal debt each year is heavily influenced by the deficit or surplus that year. When there is not enough revenue to pay for spending, the government borrows money to make up the difference.
When there is excess revenue in a given year, the majority of those funds are used to pay down the federal debt. By comparing the total federal debt to gross domestic product GDP , we can observe the government's ability to utilize the resources at hand to finance the debt the same way you and your family manage your finances to make sure that your monthly payments for your mortgage, car loans, and credit cards can be made.
Most of the federal government's debt is owned by federal trust funds and domestic investors in the United States. Sources Click for additional information More Information. Share URL. Average Healthcare Costs per Person in The interest adds up fast.
As the debt grows, so does the interest we pay. Interest will become the fastest growing part of the federal budget. In ten years, our interest will double from where it is today. This is about our future. Budget Categories Billions of Dollars , to Medicare spending is net of premiums and payments from the states.
The vast majority of Americans believe that addressing our debt should be a priority. We all have a responsibility to build a brighter fiscal and economic future for the next generation. Arrow Follow Link. Understanding the Coronavirus Crisis. Key fiscal and economic indicators as the nation responds and recovers. The Fiscal Challenge. Tax Quiz. International Countries with the highest public debt Profit from additional features with an Employee Account.
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