Only a few months after surpassing the $32 trillion threshold earlier in the year, the gross national debt of the United States reached an eye-watering $33 trillion for the first time in September.
According to the Treasury’s monthly statement, the United States currently spends more on national security than it does on interest payments on the national debt.
Phillip Braun, clinical professor of finance at Northwestern University’s Kellogg School of Management, “the federal debt squeezes out other debts in the economy.”
There is a finite amount of money in the economy. Because of the government’s massive borrowing, fewer people are ready to lend money overall, which discourages alternative forms of borrowing.
While interest rates were low, the government could have refinanced its debt, but it chose not to. Which means that as a result, borrowing rates both now and in the future are unnecessarily higher, according to Braun.
The Treasury has paid $807.84 billion in interest on its debt instruments in the current fiscal year through August, but the Department of Defense’s budget for military operations was just $695.44 billion during that same time.
This is especially concerning when you consider how much of the government budget—more than any other nation—is spent on defense.
Since the beginning of the COVID-19 epidemic, a number of major measures with high price tags have been adopted, notably the American Rescue Plan Act, which cost $1.9 trillion.
According to the Congressional Budget Office, the debt ceiling legislation passed this summer to avert a national default may reduce the deficit by $1.5 trillion over the following ten years. The savings could, however, drop below $1 trillion, according to the Committee for a Responsible Budget (CRFB), a nonprofit organization that deals with federal budget and fiscal concerns, depending on “side deals” that go against the agreement.
In a news release, CRFB president Maya MacGuineas stated that “getting the debt under control will require taking a serious look at health care, Social Security, and the tax code.”
Since much of the borrowing took place when interest rates were historically low and prices were still rising, the cost of this debt will be increased now that they are not.
According to the Peter G. Peterson Foundation, the interest on the national debt alone costs close to $2 billion per day.
Additionally, when the government owes a lot of money, it is more difficult for businesses to borrow money.
Different categories of national debt exist. Consider how possessing a credit card, a mortgage, and a car payment all reflect debt, albeit they are distinct from one another.
The national debt is divided into two categories by the U.S. Department of the Treasury for management purposes: debt held by the general public and debt owed by one government agency to another.
According to the CRFB, the national debt is made up of approximately $6.8 trillion in intragovernmental debt. The public is responsible for a substantially larger portion of the debt. Currently, that amounts to around $26.2 trillion.
The majority of this debt is held in Treasury instruments, including bills and bonds, and is owned by foreign governments in addition to banks, individual investors, state and local governments, and the Federal Reserve.
One of the largest holders of the public debt, with an estimated $8 trillion in holdings, are private investors and foreign governments.
Domestic corporate and public entities hold around 50% of this debt, and the Federal Reserve Bank holds about 20% of it. However, there is positive news regarding the debt that the Federal Reserve owns.
According to Braun, the Federal Reserve is a significant owner of public debt. “The Treasury does pay interest payments to the Federal Reserve, but the Federal Reserve then turns around and gives it back to the Treasury — that alleviates some of the issues.”
Rising interest rates will ultimately do nothing but increase the national debt, making it more difficult for the government to react to a slowing economy.
“As we have seen with the recent growth in inflation and interest rates, the cost of debt can mount suddenly and rapidly,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation. He continued, “This compounding fiscal cycle will only continue to harm our kids and grandkids with over $10 trillion in interest costs over the next ten years.”
