Gross national debt in America has reached new heights, exceeding $31 trillion, according to a recent report by the US Treasury Department.
If that’s hard for you to imagine, it basically amounts to more than $93,000 in debt for every person in the country, according to the Peter G. Peterson Foundation.
And with the dramatic rise in interest rates in recent months – the fed funds rate is currently between 3.7% and 4% – the national debt will grow at a rate that makes it even harder to ignore.
“Interest rates are a big problem,” says Phillip Braun, clinical professor of finance at North Western University’s Kellogg School of Management.
“The Treasury is funding the debt with lots of short-term loans… It will crowd out other budget items.”
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The last few years have been expensive
A deficit occurs when the government spends more money in a fiscal year than it brings in in taxes — and the last few years have been expensive.
Several large bills with high price tags have been approved since the pandemic began, including the American Rescue Plan Act, which cost $1.9 trillion, and $750 billion for student debt relief, all reducing the deficit and therefore the debt still enlarge.
And although the Inflation Reduction Act passed in August is expected to increase the deficit by 240 billion
The Committee on Good Federal Budgeting, a nonprofit organization that deals with federal budget and tax issues, estimates that the deficit will increase by $4.8 trillion by 2031.
“Excessive borrowing will lead to persistent inflationary pressures, pushing the federal debt to a new record as early as 2030 and tripling federal interest payments over the next decade — or even sooner if interest rates rise faster or more than expected,” he tells the CRFB.
Much of the borrowing in recent years has occurred while interest rates have been historically low, but now that that is no longer the case, and inflation is rising at its fastest pace in decades, the cost of that debt will only increase.
“The fact that the national debt is 1.2 times higher than the economy is not a very good thing,” says Braun. “And it’s really skyrocketed because of the pandemic. But even before that, it’s been up since the Great Recession.”
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Currently, more than $965 million is spent every day on interest on the national debt alone. The Peterson Foundation estimates that amount will triple over the next decade, making it the fastest-growing item in the federal budget.
And when the government has a lot of debt, it becomes harder for companies to borrow money.
“Federal debt crowds out other debt in the economy,” says Braun. “There is only so much money in the economy. And with the government borrowing so much, there is only so much that people in the economy as a whole are willing to lend, crowding out other types of borrowing.”
The government could have refinanced its debt when interest rates were low, he says, but it didn’t.
“As a result, borrowing costs are unnecessarily higher today and in the future,” says Braun.
So who owns America’s national debt?
There are different types of government debt. Think of it like you have a credit card, a mortgage, and a car payment—all debt, but different.
The US Treasury manages the national debt, which is divided into two different types: debt owed by one government agency to another and debt held by the public.
Interstate debt accounts for about $6.5 trillion of debt.
The much larger part of the debt is held by the public. Right now that’s about $24 trillion.
Foreign governments, as well as banks and private investors, state and local governments, and the Federal Reserve own most of this debt, and it is held in government bonds, bills, and bonds.
Foreign governments and private investors are one of the largest holders of the national debt, at around $7.7 trillion.
Domestically, the Federal Reserve holds the largest share of the national debt at around 40%. But there’s good news when it comes to Federal Reserve debt.
“The Federal Reserve has a lot of government debt,” says Braun. “The Treasury does pay interest payments to the Federal Reserve, but then the Federal Reserve turns around and returns them to the Treasury — that mitigates some of the problems.”
A warning sign
Ultimately, rising interest rates will only exacerbate government debt, making it harder for the government to respond to a slowing economy.
“For too long policymakers have assumed perpetually low interest rates, and we are now seeing in real time how dangerous that assumption is,” Michael A. Peterson, CEO of the Peter G. Peterson Foundation, said in a statement.
“With our debt exceeding $31 trillion, it’s high time to act.”
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This article is informational only and should not be construed as advice. It is provided without any guarantee.