The National Debt Approaches $32 Trillion, Will It Bankrupt America?

The national debt continues to soar. At over $31.7 trillion, it has more than doubled in a little over 10 years. If the debt doubles again in the next 10 years, it will reach a staggering $62 trillion, nearly three times greater than current GDP. Will the federal government ever slow its spending? Will the U.S. remain solvent in the coming years?

Federal Government Revenue, Expenses, and Debt

Debt occurs when annual spending exceeds revenue. The current revenue of the federal government is approximately $4.6 trillion while spending exceeds $6.0 trillion. Thus, the current budget deficit is over $1.4 trillion. It’s clear that members of Congress are spending like drunken sailors and like the Titanic, the U.S. is on a collision course with a financial iceberg. In addition, with higher interest rates, the federal government will have an increasingly difficult time meeting its obligations. Meanwhile, as politicians seek to remain in office, they will continue to use spending to buy votes. If Congress doesn’t curtail its spending or the American people fail to take a stand against it, the national debt will soar until we hit the iceberg. However, at that point, it will be too late, and the federal government will be unable to meet its obligations or provide adequate support for many essential services, leaving tens of millions of Americans out in the cold.

The Negative Effect of Too Much Debt

Excessive debt has a negative impact on the economy. According to a 2011 research paper from the Bank of International Settlements (BIS) entitled, “The Real Effects of Debt,” when government debt exceeds 85% of GDP, it becomes a drag on economic growth. It is currently greater than 120%. As the federal debt continues to rise, it will become increasingly difficult to stimulate economic growth. This could lead to some risky policy decisions from the federal government, complete with unintended consequences. It’s hard to say exactly what measures may be utilized, but since the state of the economy is a key election issue, politicians may get creative. These measures – whatever they may be – could include borrowing even more from the future. Remember, any debt incurred must be repaid, which leaves less money for the future.

According to www.usdebtclock.org, the current amount of the federal debt equates to about $247,766 per taxpayer or $94,710 per citizen. The largest items in the federal budget are Medicare/Medicaid and Social Security, consuming more than $2.8 trillion or about 61% of federal revenue. The third largest budget item is defense spending, representing another $782.6 billion while the interest on the federal debt is the fourth largest budget item at over $558.6 billion. With higher interest rates, the interest payments on the debt could become the third largest budget item at some point.

Health Care Inflation

More troubling is the possibility that the rising costs of Medicare/Medicaid could stress the budget beyond our ability to manage it. Why? Because medical inflation has typically been higher than overall inflation. In fact, in the 903 months from January 1948 through March 2023, medical inflation has exceeded general inflation 82% of the time. More recently, medical inflation has been lower than general inflation each month since March 2021.

The Clash Between Washington DC and the Federal Reserve: Fiscal and Monetary Policy

What is fiscal and monetary policy? Fiscal policy is in the realm of the federal government and consists of tax policy, spending, and regulation. Monetary policy is under the purview of the Fed and involves setting short-term interest rates, regulating the money supply, and setting bank reserve requirements. Unfortunately, the two are often at odds with each other. For example, the Fed is currently attempting to reduce inflation by slowing economic growth by raising its short-term interest rate and reducing the money supply. At the same time the federal government continues to spend excessively, which stimulates the economy.

If the federal government and the Federal Reserve acted in harmony on economic policy, the U.S. economy would be easier to manage. For example, if the economy was weak, both could implement policies to stimulate it. Conversely, If the economy was too hot, both could work together to slow its growth. This type of cooperation could eliminate excessive policy decisions. However, since politics enters the picture, you could say the federal government marches to its own beat. If the federal government considered the economy when creating fiscal policy, then it and the Fed would be rowing in the same direction. Unfortunately, and as mentioned above, adding politics to fiscal policy prevents this. As long as politicians continue to use spending to garner votes, the Fed will have a difficult time regulating economic growth and we will likely see more extreme policies, with unintended consequences.

The bottom line? If the national debt continues to rise until it reaches a breaking point, America will not be able to meet all of its financial obligations. This will cause a reduction in its credit rating, and we will have to pay a higher rate of interest on new debt, which will only exacerbate the problem. Will the national debt bankrupt America? If politicians fail to control spending, then at some point America as we know it will cease to exist.