National Debt Part 1

Continuing a focus on election issues for this November, I wanted to take a look at another hot-button issue this election season: the national debt and deficit. Most people understand that this concept of the government holding masses amounts of debt is probably not the best thing, but few really know why and how it affects them. In the first of a two part series I will focus not only on the current situation of the debt of the United States, but also what this means to it’s citizens and future Americans.

According to US Debt Clock.org, a website dedicated to tracking the current Federal and various State debts in the United States, the national debt is around $16,074,587,000,000 and counting at the beginning of October 2012. This is derived from actual data and projections from the US Treasury directly. While this is obviously a staggering number, it is hard to wrap your head around exactly what that number means. Another way to look at it is the national debt per US citizen is over $51,000. The number is even more impressive when looked at as per taxpayer, or citizen who is bringing in revenues to the government. It would take each taxpayer paying over $140,000 to pay off our national debt. While it is easy to dismiss these numbers as someone else’s problems or just politicians debts that are not really related to everyday lives of Americans, in reality this is the money that the government has borrowed and spent to educate, provide vital services such as interstates, and protect all of us. Even if someone is not on Medicaid or food stamps, in other words getting money and services directly from the government, we have all received the benefits listed previously in one way or another. While it is easy to think of the debt crisis as the problem of the government, it is really our problem too.

So the national debt is big and growing, but so what? The “so-what” is that this bulging debt has real consequences that all Americans are going to face. Numerous studies have shown that rising debt slows economic growth. This means that job creation, the ability to get credit and loans, the ability of businesses to sell products, and many other things are all depressed during times of high national debt. I think the past few years have pretty clearly shown the negative effects that slow economic growth can have on a country. It also means an increased cost of living, which goes hand in hand with a decreased standard of living. Debt and credit will be more expensive so paying for big ticket items such as houses and cars will be harder for families. High government debt has also been shown to slow wage growth and innovation, as the need to pay off debt crowds out productive investments for the future. Finally, and ultimately most importantly, a growing debt pushes today’s problems onto the plates of our children and children’s children. They will ultimately be the ones who either have to fix our mess or face the worst of the consequences.

This may leave some wondering why we cannot simply continue to pay for debt by borrowing more. In reality this would work as long as there are people out there willing to lend America more money. But if you think about it, this starts to sound like a story of “big bankers” on Wallstreet who think they can borrow to cover their losses or deficits forever. The problem with borrowing to pay for old debt is that the total amount of debt continues to grow. It costs to borrow money, so every time a government borrows to cover an old debt they are basically throwing away money. Currently analysts predict that by 2040 America’s national debt will be around 200% of GDP. Typically a “healthy” amount of debt for a country is about 15-20% and at the moment the country is a little over 25%. This prediction could quite possibly come true because as America has to borrow more and more, those loaning the money will begin to worry about the country’s ability to pay them back. Therefore the total debt of the country will grow exponentially. Think about it, you would feel fairly certain a friend will pay you back the $5 you loan them if you know that’s all that they owe anyone out of your friend group. If your friend instead owes a couple thousand dollars already to some other friends the likely hood of seeing your $5 again seems to diminish significantly. To make up for this lenders will start charging higher interest rates and premiums, further accelerating the overall debt the United States owes.

It is clear that America has a serious national debt problem that needs to be fixed, but what can be done? Next time we will look into what can be done and what the two Presidential candidates have to say about it.

Stephen Padgett

Stephen Padgett

Stephen Padgett is a current junior at the University of North Carolina at Chapel Hill. He is working toward a BA in Economics and Political Science and plans on graduating early in December of 2012. Although he does not know what he wants to do for his career, he is looking forward to an opportunity with Credit Suisse’s Operations Team this summer in Raleigh.

Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.

In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
Stephen Padgett

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