Impact of Us National Debt

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Impact of Us National Debt
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Impact of US national debt
The US public debt has risen over time to alarming levels in relation to the country’s GDP similarly the size of the federal government has increased as is the expenditure. These interrelated issues have led to call for more strict government spending and tighter budgets across the country. Historically, government debts have increased as a result of major wars. Similarly, the US national debt has increased tremendously with involvement in the wars in Iraq and Afghanistan. However, even in the absence of war spending America would still not be able to avoid federal debt. The continued increase in public debt has brought forth debates among policy makers and citizens on the long term impact of government debt. This paper delves into the nature of US national debt and the impact on taxes, interest rates, investment portfolio and future generations.
There has also been a noticeable increase in US federal debt after the recent recession from the year end of 2007. Consequently, in 2008 there was the establishment of Economic Stimulus Package and the Emergency Economic Stabilization Act in 2008. The establishment of these programs sought to prevent the return of the recession and help reduce unemployment. Government regulators and policy makers assert that this is necessary to avoid the US economy becoming less competitive in the global financial system.
Analysis of US national debt
The US national debt is an aggregate of all the debt owed by the government. A big portion of the debt is public debt owed to businesses, households or held by foreigners in the form of government bonds. The government makes a commitment to repay both the principal amount borrowed and the accruing interests, and also provides security to the debt. Debt could be classified as either local or federal. Another classification relates to the maturity time of the debt treasury notes have between one and ten years, treasury bills less than one year while treasury bonds maturity time is more a decade. In the fiscal year 2011, the US federal debt was estimated to be $ 14.8 trillion whereby $ 10.1 trillion is money publicly held by investors (GAO, 2012).
Budget deficits and federal debts are related in the sense that when Congress makes budgetary allocations then this influences the level of public debt. Thus, changes in public debt are almost similar to changes in budget deficits or surpluses. The US government borrows from the public when facing budget deficits. On the contrary, when the budget is surplus the government reduces the amount of debt held by the public (GAO, 2012). Therefore, public debt is the difference between cash deficits and accumulated cash surpluses.
Government debt and interest rates
Increase in government debt impacts on interest rates indirectly, as the debt increases so to do the interest rates subsequently causing a reduction in investment, hampering interest sensitive consumption and also cause a reduction in the value of assets held by households. The severity of this depends on the level at which government debt raises debt interests. Additionally, expansion of the government might lead to high interest rates thereby crowding out investments.
There are disagreements as to what extent the US national debt influences interest rates. Thus, it is essential to look into ways through which debt and inters rates interact. Economic theory suggests that, in a production function, federal debt crowds out capital, as marginal product of capital(MPK) is determined by the rate of interest rates (Engen & Hubbard, 2004). Thus, the level of capital stock and by extension government debt determines interest rates consequently the changes in budget deficits (federal debt) determine interest rates.
The US federal debt is increasing gradually, and in order to cater for budgetary needs the government normally results in deficit financing. In essence, this leads to more debt accumulation as the government issues treasuries to finance its operations. The issue of these financial instruments results in different interest rates than earlier treasuries due to forces of demand and supply. Even though, the interest rate is normally fixed in reality the demand of treasuries determines the interest rates, thereby exposing the federal government to interest rate risk.
Government debt and taxes
The taxation system affects the fisc...