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How Serious Is $18 Trillion in Debt?

Tuesday January 6th, 2015   •   Posted by Craig Eyermann at 5:59am PST   •  

US-debt-problemWe took a stab at answering the following question at Quora:

How serious of a problem is the US debt of over 18 trillion dollars and what do economists say about this?

Here’s how we responded:

Having the U.S. national debt be so large is a serious problem for three main reasons:

1. With interest rates currently at all time lows, because of how the U.S. national debt is structured, with over 72% maturing in less than five-years time, that means that if interest rates rise as projected over the next five years, the amount of interest that the U.S. government will have to pay to its creditors will dramatically rise because virtually all of that debt will be rolled over.

Rising Interest Rates and the National Debt

That massive amount of debt will be rolled over because the U.S. government’s spending and revenues are such that it cannot meaningfully pay down its liabilities. Instead, rising payments on just the interest owed by the U.S. government will force the U.S. government to significantly restrain its other spending (it is actually projected to be the fastest rising component of government spending during the next 10 years). Since that other spending represents how elected officials would rather spend money, it has the potential to dramatically increase political tensions within the U.S.

CBO Updates Budget and Economic Outlook: 2014 to 2024

2. The second reason is because having already run up such a large amount of debt, especially in such a very short period of time (it’s gone from roughly $10 trillion to over $18 trillion in just 6-7 years), the very large U.S. national debt will limit the ability of the U.S. government to respond to a future crisis, or given how the world works, future crises. Kind of like how depleting an emergency reservoir to put out a fire renders it useless for putting out new fires.

The Emergency Reservoir

3. There’s a third aspect of the U.S. national debt situation that has international ramifications. Because many foreign banks and institutions perceive U.S. government-issued debt as a safe asset, they will often seek to loan money to the U.S. government when the risks of lending or investing in their own nations are high. That “flight to safety” creates increased demand for U.S. government-issued debt, which helps to drive down the interest rates that the U.S. government has to pay on the money it borrows. That in turn creates a perverse incentive for the U.S. government to increase instability in other parts of the world, which might perhaps go a long way toward explaining American foreign policy under President Barack Obama.

How Obama’s destabilizing the world

Since each of these things makes things worse for ordinary people, having such a large national debt in the U.S. really does represent a serious problem — and not just for Americans.

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January 2015