Despite the debate we hear about the national debt, people don’t seem to realize the extent of the threat our national debt poses to our economy and way of life.
Our national debt is now at about $20.2 trillion, which is more money than changes hands in the entire United States in a year. In 2016, our debt held by the public reached 77% of our Gross Domestic Product (GDP). Of that, over $6 trillion is owed to foreign investors, including $1.10 trillion to Japan and $1.15 trillion to China.
In 2016, we spent $241 billion on interest on our debt. That was over 6% of the federal budget, and 1.3% of GDP. That amounts to $241 billion dollars that could pay for a service, cut back federal taxes to allow the states to take in more revenue, or more than $830 for each US citizen living in the United States.
So how exactly does this debt make us vulnerable? Our treasury bonds, which are what are sold to incur debt, have a large influence on the economy, especially interest rates. When creditors stop buying bonds, interest rates go up to try to attract lenders, making borrowing money even more costly. In a worse scenario, if the US were to go into another recession, or some other event would cause uncertainty among creditors, causing them to sell off their bonds in mass, it would force the government to pay back trillions of dollars that it doesn’t have. The options are to print money to pay off the loans, devaluing the dollar and prompting more investors to sell off their bonds, causing the dollar to plunge further, leading to heavy inflation, or to default. Default would result in a deep, global recession due to the importance of the dollar worldwide and the amounts of money some countries have invested in the United States, high interest rates, devaluation of our money, heavy inflation, and it would be much more difficult for the US to borrow money in the future.
An example of a country that has defaulted on loans is Iceland, which defaulted on their $62 billion debt in 2009. Foreign investors fled the country and the value of their krona dropped 50% within a week. For defaulting on a debt less than 1% of our debt, prices on all goods doubled within a week in Iceland.
When Germany had to make their first reparation payments on the $33 billion ($402 billion today) after WWI, post-war Germany was broke and no one would lend them money and everyone put heavy tariffs on German goods, preventing exports, so they simply printed the money. This, along with printing money for stimulus projects resulted in hyperinflation. Inflation was so bad that people shopped using wheelbarrows full of money. They used money as wallpaper. When people got paid, they went out and spent it immediately because it would lose its value if they waited. We all know how that turned out. This is an extreme example, but $19.8 trillion is an extreme amount of debt.
Our top federal expenses in 2016 were, and still are:
Entitlements (nearly $1.5 trillion). About 2/3 of that was Social Security.
Healthcare (just over $1 trillion).
Defense ($584 billion).
All other spending, minus the interest mentioned above, accounted for only $543 billion, or 14%, of federal spending. That is why we need to focus on these three areas, as well as increasing revenue, if we want to be serious about balancing our budget. For my plan to erase the budget deficit and pay off our debt, see my positions on these three topics