According to the most recent treasury report, America’s national debt has now hit over $31 trillion.
It may be a complex concept to grasp, but it essentially boils down to $93,000 in debt per American. As of the Peter G. Peterson Foundation, this is the current reality for Americans.
Interest rates have risen over the past few months, and now the Fed funds rate stands at 3.7% to 4%. Interest rates have risen to make the national debt even more of a concern.
Phillip Braun, a clinical finance professor at North Western University’s Kellogg School of Management, says, “interest rates are a major problem.”
“The Treasury finances itself mainly with short-term borrowing, and that will push other budgetary items farther down the list.”
The recent years have been expensive.
A deficit occurs when the government’s spending is higher than its total income (usually from taxes) in a given year. Over the last few years, we are spending much more than usual.
Recently, there have been several large bills approved with hefty price tags. The latest two were the American Rescue Plan Act, costing $1.9 trillion, and a $750 billion relief package for student debt. These decisions have added to the deficit. And then they add to the debt.
But the Inflation Reduction Act, passed in August and is expected to reduce the deficit by $240 billion, is just a small piece of what’s to come. People think that the policies and programs of the Biden Administration will add trillions more over the next ten years.
According to the Federal Budget Committee, a nonprofit group that addresses federal budget and fiscal issues, an estimated 4.8 trillion dollars will be added to the deficit by 2031.
The Center for Research on Federal Financial Reforms has said that high borrowing levels could lead to higher inflation, create a new economic crisis sooner than expected, and triple federal interest payments in the next decade.
Historically low-interest rates in the past couple of years have led to a lot of debt, but now that they’re not, inflation will increase, and the cost of this debt will increase.
Braun insists that the government debt being 1.2 times bigger than the economy is not a good thing. And even before the pandemic, this ratio has increased since the Great Recession.
Imagine a world where $965 million is paid in interest daily. The Peterson Foundation predicts this number will triple over the next ten years, making it the fastest-growing item within the federal budget.
Corporations find it more difficult to borrow money when the government owes a lot.
Craig Braun explains, “The federal-debt squeezes out other debts in the economy.” Only so much money is available, which leaves less of a pot for everything else. With the government borrowing large amounts, there is less money to lend.
The government could refinance its debt with low-interest rates but did not.
“This means that the borrowing costs today and into the future will be unnecessarily higher than they should be,” says Braun.
So “Who owns America’s national debt?”
When it comes to the national debt, there are different kinds. It’s like having a credit card, mortgage, and car payment — all kinds of debt, but separate.
The U.S. Department of the Treasury makes sure that the national debt is in order – which is split into two types: debts that one government owes to other agencies and debts that are owed to the public.
Around $6.5 trillion of the debt is intragovernmental debt.
All of the debt in the public sphere is about $24 trillion.
The U.S. government, banks and private investors, states and local governments, and the Federal Reserve are owners of most of this debt, which is mostly held in Treasury securities, bills, and bonds.
Foreign governments and private investors hold a vast majority of the public debt, owning around $7.7 trillion in debt.
Networks like the Federal Reserve hold about 40% of the public debt domestically. However, we can take a little comfort in the fact that the Federal Reserve’s debt is “good news.”
“The Federal Reserve holds a lot of U.S. debt,” says Braun. “The Treasury does pay interest payments back to the Federal Reserve.” Then the Federal Reserve gives it back to the Treasury – which takes some of the pressure off.”
A warning sign
The national debt will only become a bigger problem when interest rates rise, making it difficult for the government to respond to the slowing economy.
Michael A. Peterson, CEO of the Peter G. Peterson Foundation, said: “For too long, policymakers have assumed that low-interest rates will continue indefinitely, and we’re now seeing in real time how dangerous that assumption is.”
The United States has a $31 trillion debt. It’s time for the government to take action before we go bankrupt.
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