America is quickly approaching a financial fork in the road. For decades, the federal government has been running trillion-dollar deficits, kicking the fiscal can down the road with each new budget. “Endless Wars,” social spending, and most recently, the Covid-19 pandemic, has inflated the national debt by tens of trillions of dollars. At the time of this writing that debt stands at $29.7 trillion and is increasing every second.
So, if the government continues to abdicate its duty to spend responsibly, how will the exploding national debt affect the economy in the future? This was the question recently explored by the Peter G. Peterson Foundation which sees the potential fallout of the national debt burden turning into a bottomless pit of interest payment and reduced economic versatility if not addressed promptly.
Firstly, the enormous debt already incurred will lead to astronomical amounts of money being poured into servicing the interest alone. This will inevitably lead to a decrease in public investments. "Over the next 10 years, the Congressional Budget Office (CBO) estimates that interest costs will total $5.4 trillion under current law. Currently, the United States spends over $900 million per day on interest payments." To put the severity of this outcome in perspective, the CBO estimates that over the next thirty years interest payments will be the largest federal expenditure and may likely "be more than three times what the federal government has historically spent on R&D, non-defense infrastructure, and education combined."
One key to this situation is rising interest rates. While rates have been historically low for years, especially in the Covid-19 era, “cheap money” is leading to higher than anticipated inflation in the economy and will only get worse if not addressed now. Raising rates to fight inflation will make debt more expensive for the government, but also make it far less conducive for private investment growth, as well. In this scenario, the foundation argues:
…Entrepreneurs face a higher cost of capital, potentially stifling innovation and slowing the advancement of new breakthroughs that could improve our lives. At some point, investors might begin to doubt the government’s ability to repay debt and could demand even higher interest rates — further raising the cost of borrowing for businesses and households.
This could ultimately lead to lower standards of living for American citizens, including reduced access to education and competitive job skills:
Fewer education and training opportunities stemming from lower investment would leave workers without the skills to keep up with the demands of a more technology-based, global economy. Faltering support for research and development would make it harder for American businesses to remain on the cutting edge of innovation, and would hurt wage growth in the United States.
That government spending in the United States is out of control is obvious. What isn’t obvious is whether politicians will change course in time to avert economic disaster or if they will keep overspending until crisis forces their hand. What is clear is that the federal government cannot continue on the same track without a financial reckoning coming for American citizens and that the spending free for all which the government has indulged in for years may well prove to upend the stability of the country in the near future.
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