Why is the U.S. National Debt so High?

Why is the U.S. National Debt so High?

Written by:  Andrew Jones 

On February 1, 2022, the U.S. national debt surpassed $30 trillion for the very first time. The national debt measures the sum of all money that the U.S. federal government owes to its creditors. The majority of the national debt is held by the public (over $22 trillion). But it’s also owed to foreign governments, U.S. banks, investors, the Federal Reserve, holders of saving bonds, etc. The graph below shows the U.S. national debt from 1989 to 2021. The national debt increased by over 800% during that period.

The national debt is an accumulation of federal budget deficits. Each new spending program and tax cut adds to the debt. Our past few presidents have all contributed to growing the national debt to what it is today. This is for things such as helping families and businesses recover from the COVID-19 pandemic, resolving the 2008 financial crisis, and fighting the Great Depression. Another portion of the national debt comes from investment in foreign countries. China and Japan buy Treasury to invest their export proceeds that are dominated by U.S. dollars. They’re more than happy to lend America, their largest consumer, so that it will keep buying their exports. The debt ceiling has been raised frequently since 1960 (over 78 times). In December of 2021, the ceiling was raised by $2.5 trillion, and it now stands at $31.4 trillion. This increase was the largest dollar amount increase to the national debt in history. 

The national debt impacts the average U.S. citizen in many different ways. When the national debt is below the ceiling, government spending continues, and that contributes to a growing national economy. This means that more funding programs are available to take advantage of. But when the national debt is at, or above the ceiling, the standard of living is impacted. Interest rates will start to increase, which will impact the economy. The stock market could be affected negatively because of a lack of consumer confidence. This would lead to a lower return on investment and even the possibility of a recession. The currency value is also affected because it's directly tied to the value of a country’s bonds. Goods and services will become more expensive and that will contribute to inflation. 

The U.S. national debt could be reduced by raising taxes/or cutting spending, but either of these tactics could slow economic growth. Another tactic could be to lower interest rates to stimulate the economy and generate tax revenue. Low-interest rates would make it easier for people and businesses to borrow money. That being said, interest rates that have been kept near zero, aren’t always guaranteed to reduce the national debt of a nation. Another option for the U.S. is to implement a tax increase. Raising taxes can be politically challenging because various interest groups will defend their tax exemptions. This can lead to a complicated cycle of reducing the national debt. 

In all, the U.S. national debt has become a growing problem for the government and the federal reserve, as it has reached an all-time high. As the national debt continues to grow, all of us are impacted in ways we might not be aware of. By understanding what the national debt is and how it impacts us, we can be more knowledgeable and prepared for the future. A solution for the rising national debt would help to lessen the negative effects on people and businesses in the U.S. 

Works Cited 

Adkins, Troy. “What the National Debt Means to You.” Investopedia, Investopedia, 22 Feb. 2022, https://www.investopedia.com/articles/economics/10/national-debt.asp.

Napoletano, E. “U.S. National Debt Surpasses $30 Trillion: What This Means for You.” Forbes, Forbes Magazine, 16 Feb. 2022, https://www.forbes.com/advisor/personal-finance/u-s-national-debt-surpasses-30-trillion-what-this-means-for-you/.

Treasury, U.s. Department Of The. “Debt to the Penny.” U.S. Treasury Fiscal Data, https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny.