The U.S. government’s national debt recently topped $34 trillion, a new record. But how worried should you be about the country’s borrowing?
What is the national debt?
The national debt is the total amount of money the U.S. owes its creditors, which includes “the public” (individual investors, businesses, commercial banks, pension funds, mutual funds, state and local governments, the Federal Reserve System and foreign governments) as well as other parts of the federal government, including Social Security, Medicare, and other specialized trust funds.
How much debt can the US take on?
It’s unclear just how much debt is too much for the country to bear.
“We don’t know how high this thing can go,” said David Andolfatto, a professor of economics at the University of Miami. “But we do know that there’s likely a limit.”
Research from the University of Pennsylvania’s Penn Wharton Budget Model estimates that the U.S. debt held by the public cannot exceed roughly 200% of the GDP, per findings published late last year.
What does the national debt mean for interest rates?
Some economists say the debt levels could lead to more challenges for Americans down the road by hiking the cost of borrowing.
“If the government starts pumping out a lot of debt, interest rates are going to rise, and then your mortgage rate is going to rise as well,” Andolfatto said.
Another concern is that as the debt and interest keep growing, the government will cut funding to programs like Social Security and Medicare.
What about inflation?
Higher inflation is another concern among some economists.
Higher levels of debt through cutting taxes or government spending could put more money in consumers’ pockets, prompting them to spend more. This could cause the inflation rates to swell, according to Andolfatto.
“Generally, economists think that when households feel wealthier, they’re likely to spend more,” he said. And that spending could drive up prices as demand for goods soars. Source: USA Today
