EDITOR'S NOTE: Imagine being in debt of $93,000, and let’s assume it’s an amount that’s above your annual income. Now imagine your rate of interest is up to 4%. Like every responsible borrower, you realize that this is a debt that needs to be paid and reduced ASAP. Yet, if you consider the national debt that binds America to its creditors, you’ll realize that this is no thought experiment. It’s the equivalent every person in the US owes by way of the gross national debt should its record $31 trillion be equally distributed to everyone in the country. Clearly, it’s a major problem, and it may be disheartening for Americans who follow the national debt to know that it’s been rising over the decades and that interest rates will balloon it to levels already considered beyond payable. So, if the government is only racking up your collective debt while doing very little to reduce it, what options do you have to reduce your exposure to this toxic and potentially terminal debt cycle?
The gross national debt in America has hit new heights, surpassing $31 trillion, according to a recent U.S. treasury report.
If you find that hard to wrap your head around, it basically boils down to more than $93,000 of debt for every person in the country, according to the Peter G. Peterson Foundation.
And with the dramatic rise in interest rates over the past few months — the Fed funds rate is currently between 3.7% and 4% — the national debt will be growing at a rate that makes it even harder to ignore.
“Interest rates are a major problem,” says Phillip Braun, clinical professor of finance at North Western University’s Kellogg School of Management.
“The Treasury finances the debt with a lot of short-term borrowing … It'll push other budgetary items out.”
Want to invest your spare change but don't know where to start? There's an app for that
Looking for consistent returns? You could be the landlord of Walmart, Whole Foods and Kroger (and collect income every quarter)
A TikToker paid off $17,000 in credit card debt by cash stuffing — can it work for you?
The last couple of years have been expensive
A deficit is what happens when the government spends more money in a fiscal year than it brings in through taxes — and the last couple of years have been expensive.
Several large bills with hefty price tags have been approved since the start of the pandemic, including the American Rescue Plan Act, which cost $1.9 trillion, and $750 billion for student debt relief, all adding to the deficit, which then adds to the debt.
And though the Inflation Reduction Act, which was passed in August, is expected to reduce the deficit by $240 billion, policies and programs brought in by the Biden Administration are expected to add trillions more over the next decade.
The Committee for a Responsible Federal Budget, a non-profit that addresses federal budget and fiscal issues, estimates that $4.8 trillion will be added to the deficit by 2031.
“Excessive borrowing will lead to continued inflationary pressures, drive the national debt to a new record as soon as 2030, and triple federal interest payments over the next decade — or even sooner if interest rates go up faster or by more than expected,” says the CRFB.
Much of the borrowing in the past couple of years happened while interest rates were historically low, but now that they’re not, with inflation rising at the fastest pace in decades, the cost of this debt will be amplified.
“Having the government debt being 1.2 times larger than the economy is not a very good thing,” says Braun. “And it really jumped up because of the pandemic. But even before that, it's been rising since the great recession.”
Currently, more than $965 million is spent every day just in interest on the national debt. The Peterson Foundation estimates that will triple over the next decade, making it the fastest-growing item in the federal budget.
And when the government owes a lot, it makes it harder for corporations to borrow money.
“The federal debt squeezes out other debts in the economy,” says Braun. “There's only so much money in the economy. And so with the government borrowing such large amounts, there's only so much that people are willing to lend overall in the economy, so it pushes out other types of borrowing.”
The government could have refinanced its debt while interest rates were low, he says, but it didn’t.
“Which means the borrowing costs today and into the future are unnecessarily higher because of that,” says Braun.
So who owns America’s national debt?
There are different kinds of national debt. Think about it like having a credit card, a mortgage and a car payment — all debt, but different.
The U.S. Department of the Treasury manages the national debt, which is split into two different types: debt that one government agency owes to another, and debts that are held by the public.
Intragovernmental debt accounts for about $6.5 trillion of the debt.
The much bigger piece of the debt is held by the public. Right now, that’s about $24 trillion.
Foreign governments as well as banks and private investors, state and local governments and the Federal Reserve own most of this debt, and it’s held in Treasury securities, bills and bonds.
Foreign governments and private investors are one of the biggest holders of the public debt, owning around $7.7 trillion.
Domestically, the Federal Reserve holds the largest share of the public debt, at about 40%. But there is good news when it comes to the debt the Federal Reserve owns.
“The Federal Reserve owns a lot of government debt,” says Braun. “The Treasury does pay interest payments to the Federal Reserve, but then the Federal Reserve turns around and gives it back to the Treasury – that alleviates some of the issues.”
A warning sign
Ultimately, rising interest rates will only exacerbate the national debt, making it harder for the government to respond to a slowing economy.
“For too long, policymakers have assumed perpetually low interest rates, and we are now seeing in real time how dangerous that assumption is,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation in a statement.
“As our debt crosses $31 trillion, it’s past time for action.”
What to read next
Here are the top car brands that rich Americans earning more than $200K drive most — and why you should too
You’re probably overpaying when you shop online — get this free tool before Black Friday
Inflation eating away at your budget? Here are 21 things you should never buy at the grocery store if you are trying to save money
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Originally published on Yahoo Finance.