The National Debt and How It Affects You

The blog explains that the national debt is the total amount of money a country's government owes to various creditors, and how it can affect individuals indirectly through changes in taxes and services. It also outlines how the national debt impacts the economy, interest rates, inflation, job opportunities, and the value of the US dollar.

Did you know? The United States government has carried a national debt since the very beginning, having borrowed around $75 million to help finance the Revolutionary War.

So the national debt isn’t new, but it is increasing. Have you ever wondered how the national debt might affect you as an individual? Here’s what you should know.

National Debt Defined

The national debt is the total amount of money that a country's government owes to various creditors. Just like an individual, the government borrows money to help finance budget deficits and cover any outstanding financial obligations.

How the National Debt Grows

Governments pay their bills through the revenue generated by collecting taxes from residents, along with a variety of other revenue sources. But governments often spend more money than they collect. They usually cover the resulting budget deficit by issuing government bonds, which are essentially IOUs the government sells to investors, including individuals, institutions, and even other governments. The investors are then repaid with interest over time.

If a family member gifted you with a government savings bond that matures in 30 years, you’re invested in the government. In other words, you’re a part of the national debt.

How the National Debt Affects the Average Person

The national debt is just one part of the national economy. It’s somewhat unlikely to impact you directly, but the ripple effects of a growing national debt may very well be felt through policy changes and government actions responding to the debt.

Increased taxes on citizens

To make its debt payments, the government might attempt to raise revenue by increasing taxes.

For everyday citizens, higher taxes often mean less disposable income, less consumer spending, and stunted business investment, all of which are typically bad for the economy and individuals.

That said raising taxes is just one option, so just because the country has a national debt doesn’t necessarily mean your federal taxes will increase.

Decreased access to government programs and services

Rather than increase income, the government may attempt to reduce expenses by cutting spending for programs and services. This decreased spending could impact infrastructure projects like roads and bridges, housing programs for needy families, medical care for veterans, and on and on.

While the federal government doesn’t face quite the same problems as American families, when debt payments go up, there’s usually a sacrifice or two to be made.

Higher interest rates

High levels of government borrowing can crowd out private investment. That’s because when the government competes with private borrowers for funds in the financial markets, interest rates may be driven up. When interest rates go up, individuals and businesses reduce or stop borrowing, and that in turn reduces investing, which slows economic growth and even negatively affects job growth.

How the National Debt Contributes to Inflation

When the supply of money in the economy is larger than the supply of goods and services, that oversupply can reduce money’s purchasing power and raise prices. Remember the supply shortages during the pandemic – for example, the cost of new and used cars? The ripple effects are still being felt. When that happens, central banks may need to tighten monetary policy to control inflation. One way to do that is to raise interest rates, which reduces lending.

National debt can also contribute to inflation if the government finances its debt by printing more money. But this is rare—most governments don’t directly fund their debt through money creation, but instead through issuing bonds and borrowing from the public.

How National Debt Affects Job Opportunities

It’s complicated. High levels of national debt can potentially lead to higher taxes and higher interest rates, both of which are bad for business investment and job growth. There are lots of factors that go into job creation, though.

Again, just because the national debt goes up doesn’t mean that jobs will go down.

How National Debt Affects the US Dollar

You might wonder if the national debt affects the value of the money in your wallet. It’s possible, but it’s also not straightforward—with lots of factors in play. Here are a few possible ways the dollar can be affected.

• If investors become concerned about the government’s ability to manage its debt and they sell off their holdings, that can reduce the value of the U.S. dollar as compared to other currencies.
• If the US debt is perceived as unsustainable, that could raise concerns about future inflation. Inflation reduces the purchasing power of a currency and leads to its value depreciating. If investors think this will happen to the dollar, they could sell, which would depress its value.
• Increased borrowing often leads to increased interest rates, which have a higher return for investors. In this scenario, higher interest rates could actually make the dollar more attractive, potentially increasing its value.

But national economies are very complex, and a rising national debt is certainly not the only factor affecting the value of the US dollar.

The Bottom Line on National Debt

Reducing the national debt is complicated because the government pays for important services for people. It can’t just slash programs and services without considering the wellbeing of its citizens. Policy choices have to balance debt reduction and economic growth against meeting its essential government responsibilities.

For many people, rising interest rates make it harder to afford even the necessities. If you feel overwhelmed by debt and other expenses, we can help. MMI offers free and confidential financial counseling available 24/7 online and over the phone. Let an expert help you make the most of your money.