The national debt level has been a subject that is significant to the U.S. domestic policy controversy. Given the amount of fiscal stimulus that has been pumped into the U.S. economy over the past couple of years, it is easy to comprehend why many people are beginning to pay close attention to this issue. Unfortunately, the manner in which the debt level is transmitted to the general public is usually very obscure. This problem ought to be coupled with the fact that many people do not comprehend how the national debt level affects their daily life, and you have a centerpiece for discussion.
National Debt vs. Budget Deficits
Prior to addressing the way the national debt affects a people and a nation, it is initially imperative to comprehend what the diversity is in the midst of the federal government’s annual budget deficit, and the country’s national debt. Simply explained, the federal government generates a budget deficit whenever it spends more money than it brings in through income generating activities such as taxes. In order to operate in this manner, the Treasury Department has to issue treasury bills, treasury notes and treasury bonds to compensate for the diversity. By issuing these types of securities, the federal government can acquire the cash that it requires to provide governmental services. The national debt is simply the net accumulation of the federal government’s annual budget deficits.
How the National Debt Affects Everyone
Given that the national debt has recently had a faster growth than the American population’s size, it is fair to wonder how this growing debt affects average individuals. While it may not be obvious, levels of national debt directly affect people in at least three direct ways.
- First, as the national debt per capita enhances, the likelihood of the government defaulting on its debt service obligation enhances, and therefore the Treasury Department will have to raise the yield on the treasury securities that are newly issued in order to attract new investors. This diminishes the tax revenue amount 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 enhances, American corporations, that are in operation will be viewed as riskier, even necessitating an increase in the yield on newly issued bonds. In turn, this will require corporations to raise the priceof their products and services in order to meet the enhanced cost of their debt service obligation. Over time, this will cause people to disburse more for goods and services, resulting in inflation.
- Thirdly, as the yield offered on treasury securities enhances, the cost of borrowing money to purchase a home will even enhance, because the cost of money in the mortgage lending market is directly tied to the short-term rates of interest set by the Federal Reserve, and the yield offered on treasury securities issued by the Treasury Department. Given this established interrelationship, an enhancement in the rates of interest 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 disburse more of their money to cover the expense on the loan that 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.
The level of national debt is one of the most imperative issues of public policy. When debt is appropriately used, it can be brought into use to foster the long-term growth and prosperity of a country.