The word “debt” is thrown around everyday. At its core, it’s just a fancy word for owing someone something, typically money.
Now, not all debt is bad. When you know you have the ability to eventually pay it back without breaking a sweat, all is good. When managed smartly, debt can help you along your life path, like taking a loan for college to increase your career potential. But, that does not mean you can spend your money like there is no tomorrow.
And no, you do not have to pay off your debt as fast as you can; you still need money to make a living, and not all income can go towards what you owe. With a set plan, you can easily chip away at your debt. But remember, time is money, literally. Those interest payments can pile up quickly and you may end up paying more than what you owed. Minimum payments plus constant spending does not get rid of the problem. Have a balance of both time and money.
There are two other terms that will often come up when talking about debt: budget deficit and budget surplus. When you have more income than spending, you have a budget surplus, and vice versa would be a budget deficit. The United States (US) has run a deficit for almost 20 years, and the debt has gone through the roof.
THE FACTS:
As I write this, the current US debt is $32.615 trillion, increasing every second. This website does a great job of visualizing all the major values that go into the US monetary system. It is crazy to see all the numbers rapidly changing. It just comes to show how much economic activity is going on at every single moment, especially considering that the GDP increases simultaneously.
Believe it or not, it is the norm for the top 10 growing countries to be trillions of dollars in debt, (except India and South Korea). No country has as much debt as the US, but no country has a GDP as high as it either.
When a nation is buried in debt, it will have less potential to invest in itself. There will be less opportunities and flexibility if all economic growth slows down. Expectations for inflation increase and people lose confidence in the economy. In times of crisis, the country will not be equipped to leisurely spend to solve the problem. This takes away freedom in many aspects
Turns out the Federal Reserve System (FED) is the largest holder of US debt. During the peak of the pandemic, the FED bought many Treasury Bonds to keep the economy from shutting down. As of now they owe around $6.1 trillion, almost 20% of the total debt.
So what’s all the talk about the debt ceiling?
Before we get to the answer, here is another definition check: Debt ceiling is a cap on the total amount of money the US can borrow to enhance the nation and cover financial obligations. It was initially created so that the Congress would not have to approve every time a transaction added to the debt.
In January of 2023, the US reached its debt limit at $31.4 trillion, and the ceiling was increased in June of 2023. If the debt limit had not been increased accordingly, the US would have to rely only on the cash at hand and default on the trillions they owe, leading the country, and by extension, the entire world to collapse.
Easy Fix?
The real question is: “Why can’t the US government just print money to pay off the debt?”
Contrary to popular belief, the government is not responsible for printing money; the FED takes care of that by ordering the Treasury Department to print money. And of course, any shortcut solutions seem tempting, but printing money would just leave the economy worse off.
Say we print and drop $32 trillion into the economy, we do not have $32 trillion worth of goods and services to use it on. With that much money chasing too few goods, all the prices are going to spike, pushing us into the spiral that is inflation.
Even the relatively little money ($5 trillion) pumped into the economy during the pandemic left us at a 9.06% inflation rate last year. We faced it first-hand, paying higher prices for gas and eggs. Imagine that but six times worse. Forget the idea of inflation; we would encounter its dangerous cousin, hyperinflation, each digit multiplying by hundreds and thousands.
Lastly, I love me a little story time, so here we go:
While many people think the worst case of inflation occurred in Germany after World War I, it actually was in Hungary following World War II.
Inflation between 1945 and 1946 and was brought upon the country due to the idea of ‘just printing more money,’ but resulted in an inflation rate of 41,900,000,000,000,000%. To put the situation into perspective, prices doubled every 15 hours. If you walked into a coffee shop, you would pay a higher price for a cup of coffee than the person walking out the door behind you. Hungary’s pengos became worthless, where savings and wages lost value within days. In fact, pengos became more useful to make fires and be used as wallpaper. To bring the madness to an end, their currency was replaced entirely by the forint.
I think we would all prefer to pay off the debt the right way rather than printing too much and using dollar bills as toilet paper.
Grasping the Scale…
Check out this impressive visualization. It clearly pictures the money the US owed when we hit the debt ceiling.
Hard to believe, but we would have to add up the GDPs of India, Japan, and China to amount to the US debt. And by the way, if we paid a dollar a second, it would still take more than 700,000 years to pay off the debt. Crazy.
Should we be worried?
One question that many ask economists is “should we be worried about the national debt?” Heck, quite a few high school students were wondering the same thing at a program I attended this past week: Economics for Leaders. Our professor had a simple answer: “Yes, the debt is increasing daily, but that is no concern when our GDP is following the same pattern.”
Since our country shows no signs of decline, our federal government will surely stay alive. When we borrow more money, it opens up more economic activity, generating money to slowly fill the debt gap. But if we keep borrowing to pay off existing amounts, how are we going to get out of this pickle?
At the end of the day, the national debt is caused by political decisions in the form of tax collection, government spending, and third party negotiations. One tip many economists have given is to focus only on long-lasting investments such as medical research and infrastructures. Investing millions on hipsters to stop smoking or on dead comedian hologram technology is not going to take the country far. Especially in a time of such large debt, these should not be prioritized.
Debt, debt, debt… So what do we need to do? Do we keep calm because we are still growing as a country, or do we worry that our government is not making the smartest decisions? I say a mix of both. The debt has to be taken care of at some point and inflation is not the solution for it. Rather, implementing smart changes and advocating for the greater good can pull us up.
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