The national debt has become a central focus of US domestic policy discourse. Considering the amount of fiscal stimulus that has been injected into the US economy in recent years, it is no wonder people are waking up to the subject. It is becoming very relevant, very personal.
I believe to understand this issue we have to recognize that the National Debt and budget deficits have everything to do with each other.
Simply stated, a budget deficit is created when the government spends more than in takes in revenue. In other words, the larger the budget deficit is – the larger the national debt will be. Running consecutive budget deficits will grow the national debt.
In this scenario the government, since it creates no goods or services, has to look to others for the money. It has very few options: 1) it can tax its citizens; 2) flood the economy with more Fiat, printed currency, which is backed by little more than its good will or; 3) borrow money from other nations such as China.
The issuance of debt is typically accepted by the public, so long as the proceeds are used to stimulate the growth of the economy in a manner that will lead to long-term prosperity.
The National Debt affects everyone.
First, as the national debt increases so does the likelihood of default. In order to attract investors the Treasury Department will have to raise the yield on newly treasury securities. This will reduce the revenue available to spend on other government services in order to support the growing debt service.
Second, businesses operating in the US will be viewed as riskier, thus the higher yield will be required on their newly issued bonds. This in turn will push up prices in order to meet higher debt service and eventually, the consumer will be paying more for the same goods and services … this will fuel inflation.
Third, as the yield on treasury securities increases so will the cost of home mortgages, which are directly tied to short-term interest rates, set by the Federal Reserve. Given the interrelationship, an increase in interest rates will push home prices down … this spells extended recession and slow housing recovery.
Fourth, since the yield on US Treasury securities is currently considered a risk-free rate of return any bump in the yield will make it harder and more expensive for the private business sector to borrow and raise capital. Historically, this environment grows the size of government while shrinking the size of the private sector.
Finally, the risk of a country defaulting on its debt service increases the risk of its losing it social, economic and political power, thus turning a national debt dilemma into a national security issue.
The US National Debt currently approaches $40,000 per capita and is rapidly rising.
And thank you for making me Your Orange County Real Estate Connection
Michael Caruso, Broker ABR ABRM CRB CRS GREEN GRI
2007 President, Orange County Association of Realtors (949) 753-7900