How the National Debt Impacts Your Money

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The national debt is in the news nearly every week, but it’s a bit nebulous compared to most financial topics. The U.S. government’s public debt is more than $22 trillion, an incomprehensibly large number. But while it may seem like something that politicians squabble about, the debt can have serious impacts on the economy.

The debt has been skyrocketing in the last few years while the economy has been doing well. It’s easy then to think that the debt isn’t all that important. And while it may not be an issue that’s setting up a doomsday scenario, the national debt is certainly a problem that needs to be addressed sooner rather than later.

National Debt Explained

The national debt is not that much different than any individual’s debt, it’s just much larger. Simply put, it’s how much money the U.S. government owes other people. The government has operated on a budget deficit every year since 2001, meaning it spends more money than it takes in. Thus, the national debt continues to grow.

While the national debt reaches all-time highs each year, debt itself is nothing new in America. Following the Revolutionary War, for example, the newly-born country dealt with national debt for the first time. Government spending has increased significantly in the last few decades, however, meaning it becomes harder and harder to shrink the debt every year.

Economy-Wide Impacts of the Debt

While some economists think the national debt is nothing to worry about, many say it has clear negative impacts on the economy. Generally speaking, it’s accepted that debt is a negative thing for the country and the economy.

Part of the problem is where the spending is directed. Spending that is geared toward growing the economy, like President Obama’s 2009 stimulus package, can boost national wealth even if it adds to the debt. But the government often spends most heavily on services that provide no direct economic value. Medicaid, for example, is a critical social program but doesn’t directly provide any sort of financial boost. Thus, that debt similarly adds little to the economy.

The debt impacts the national economy in a lot of ways, but one of the biggest is how it hurts the stocks and bond markets. As the deficit increases, the government issues more bonds to recoup lost money, meaning that the overall bond market sees an increase in supply. That leads to lower prices and higher interest rates on bonds.

Moreover, since government bonds are considered risk-free investments, an increase in supply can lead to riskier investments losing demand and being crowded out. Stock and bond prices in the private sector then fall and companies struggle. Meanwhile, the public sector continues to take a chunk of the pie. While this is just one example, it illustrates the long-reaching effects that the national debt has.

What This Means For Your Wallet

What really matters is your money though. The average American still might not see much wrong with the national debt unless they see how it hurts them directly. First off, the government uses tax revenue to pay off the debt. Higher debt means higher taxes, meaning less money in your pocket.

The debt can also stunt economic growth and limit the creation of new jobs. If government spending is mostly geared toward services like Medicare and Social Security, less money goes toward job-creating work projects. As fewer new jobs are created, people remain unemployed and without income longer, hurting overall economic growth.

All that is to say the debt presents real issues for Americans. And while it may not be the most timely issue, it’s certainly not getting better.

Read more on How to Calculate Your Debt-to-Income Ratio

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