How Does the US Debt Affect You?

By Steve Beaman, USDR.

As I talk with people from around the nation, I am constantly reminded that the federal government has almost $17 trillion in debt and unfunded liabilities totaling almost $100 trillion.  The important question is of course how this really affects you; or does it?  I mean with all the hoopla on the right, you’d think the world was coming to an end and with all the people on the left being so blasé’ about it, you’d think it does no’t matter.  So what is a normal person to think; what is the truth?

American’s are becoming increasingly uneasy about the nation’s debt situation and even the global debt situation.  In America today, there is a total of around $55,000,000,000,000 in actual debt between government, business and individuals.  This is staggering by some measures as our economy is only a little over $15 trillion; so our debt is in excess of 3x our national income.  If we normalize these numbers down to the “per person” level, our income is around $50,000 and our debt is around $150,000; adjusted further to reflect only people who are tax payers (so we’re not counting children, the poor, etc.) those numbers are still around $50,000 income because that has to provide for everyone regardless of status, but the debt grows to around $300,000 per tax paying person.  So think about it as having $50,000 in income and owning a $300,000 house.  You’re not in real trouble if interest rates stay low and you keep your job, but if rates rise, or you lose your job look out.

The simple answer to whether or not this debt affects us in our real lives is categorically yes, it does affect us, and it does so in four tangible ways; interest rates, access to credit, inflation and economic growth.  Let’s take just a moment and drill down into those four key areas.

First, interest rates are set by global supply and demand of debt and by the perceived security of the debt instrument.  Today, interest rates in the U.S.  are near zero because there is an enormous supply of debt, a large demand for debt driven in part by the U.S. Central Bank (The Federal Reserve Bank) and a high degree of safety as the debt of the United States is ultimately secured by the taxpayers in the United States, the world’s largest economy.   These dynamics benefit U.S. borrowers for home

mortgages, car loans and business debt.   However, the risk is that the demand for U.S. debt will shrink because eventually the FED will discontinue its buying spree.  Should this happen, rates will increase in order to provide incentive for others to step in and loan the government money.

The second issue is access to credit and the issue here is supply and demand once again.  As the government takes up more and more of the supply of lenders, there are fewer and fewer lenders available for consumers and business.  This is felt by businesses and consumers as things like the amount of down payment for a loan increases or the need for a superior credit rating increases. Think about it, would you rather loan money to the government where you’re virtually assured of repayment or an individual or business that might well default?  A rational lender will respond by saying a) you pay a higher interest rate for the increased risk; b) you need to put up more collateral; and c) you need to verify your ability to repay.   This increased difficulty in borrowing money is the second risk.

The third thing is inflation.  Now understand that typically inflation is caused by an over demand for a limited supply meaning that when U.S. manufacturing capacity is nearing its limits, prices naturally rise.  However, there is a second type of inflation which is caused by a devaluing U.S. currency.  Simply stated, as more dollars are printed due to expanded borrowing, each dollar in circulation is worth less and thus prices rise.  We have seen this primarily in food and fuel; interestingly two things left out of government inflation statistics.

The fourth thing is economic growth and it is directly affected by the first three issues and this is where debt does directly affect you.  As interest rates rise with a changing supply/demand equation, and access to credit to the private markets is naturally restricted, and prices on core commodities rise the economy’s growth is slowed down.  This credit situation we’re currently experiencing is one of the major reasons our national growth rate hovers around 2% per year.  This economic malaise affects real people by limiting access to new jobs; limiting compensation increases and bonuses and increasing the uncertainty people and businesses feel which in turn reduces consumer spending which ties right back to reduced economic growth.

Until the United States begins to show signs of reducing its red ink, the economy will continue to experience the anemic growth rates of the past few years.  This debt DOES affect everyone.  In the near term, it will not lead to the apocalypse some on the right are suggesting, but by the same token it is a real and important issue unlike what some of the left would suggest (Paul Krugman comes to mind).  To rekindle a significant growth rate in our economy and thus restore middle class prosperity, the United States must get its financial house in order.  Until then, normal people will suffer, and investors will prosper.  How you ask?  By using investments that capitalize on fluctuating currencies, commodity prices and equity and debt markets and the mission of The Society is to teach you how to do that!  We can help.

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All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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