As of today, the United States government has borrowed over $16 trillion. Such an enormous debt poses short-term and long-term dangers.
The most immediate problem is that we are spending huge amounts of money just paying the interest. In 2008, we spent $253 billion on interest alone — that’s six times what we spend on the Department of Education, or thirteen times more than NASA. All just for interest payments, and much of it to foreign governments.
A growing debt means higher taxes, painful cuts in government services, job loss, and a very real danger of economic catastrophe. Unless we stop this out of control spending now, the consequences could be devastating.
How bad could it get?
To understand how bad the debt situation could get, it’s important to understand who we actually owe the money to. The government can get loans from a few different sources:
- Private investors
- Foreign governments
- The Federal Reserve
- Intragovernmental holdings
The majority of the debt is in the first two categories. Those investors include individuals and businesses (especially banks), as well as foreign governments (especially China). Other countries buy our debt because it is a good investment — they trust us to pay them back, with interest. The most recent figures show we owe about $4.4 trillion to the governments of other countries, including more than $1.1 trillion to China alone.
The debt is dangerous because it isn’t under control. We cannot force anyone to loan us money, and the interest we pay can become more expensive. If that happens, our expenses go up, but our income doesn’t — so we sink even further into debt.
If investors are unwilling to lend the U.S. money, the government can go to the Federal Reserve. The Fed can literally create money out of nothing (print it), and then lend it to the government. But creating new money has a catch — inflation. Printing money can lead to a vicious cycle, as inflation devalues the money already in the economy.