The national debt surpassed $40 trillion this week, a concern to consumers who want to borrow money.
Tennessee Tech Assistant Professor of Economics Tim Roberson said Roberson said the speed at which the debt is growing is more concerning than the current total because the annual budget shortfall is projected to increase. Roberson said the federal government faces rising future obligations for Social Security, Medicare, Medicaid
“As the debt goes up, as the the government’s deficit, their annual shortfall in their budget goes up, interest rates have gone up along with it,” Roberson said. “It’s, it’s just harder to borrow money than it was 10 years ago.”
Roberson said the majority of the debt is actually held by United States banks, mutual funds, the Federal Reserve, and individual American citizens who own Treasury bonds.
“There’s a perception we owe it to other countries and there’s a false perception that we owe it to China and that China can somehow call in that debt and make us pay it whenever they want,” Roberson said. “None of those things are true.”
The total federal debt includes approximately $8 trillion that one part of the government owes to another through various accounting schemes. Roberson said the remaining $32 trillion in debt held by the public is roughly equal to the annual value produced by the United States economy.
“The worry right now is that the US political system can’t handle taking unpopular steps and that voters and citizens just don’t understand what those tradeoffs are,” Roberson said. “Someone has to pay higher taxes in the future or put up with lower benefits in the future or everyone has to withstand higher inflation in the future to make the budget math line up.”
Roberson said heavy government borrowing creates a “crowding out” effect that forces individuals and businesses to pay higher interest rates to banks. Roberson said this competition for funds makes it more difficult for the private sector to secure loans for homes, vehicles, or new business ventures.
Roberson said the long-term consequences of the current debt trajectory could include levels of inflation not seen in the United States for 45 years. Roberson said policymakers face difficult choices between reducing spending, increasing revenue, or allowing inflation to rise automatically if no action is taken.
“The first thing is it would be difficult to refinance their house if interest rates never go down,” Roberson said. “If government borrowing keeps going up that’s going to put upward pressure on interest rates and the chances of you being able to refinance are pretty low. Uh, that is if you ever want to move into a new house and you need to borrow money to do that or if you ever need to buy a new car or if you ever need to take out a loan to go to school, uh you might have to do so at higher interest rates.”
Roberson said Social Security is currently facing automatic benefit cuts of approximately 30 percent in the early 2030s unless legislative changes are made.
