How the U.S. National Debt Affects You

Nearly every day, the average American listens insouciantly to new reports of the skyrocketing national debt and dismisses the news as irrelevant. It’s tempting to think of the national debt as an abstract concept with little personal application, especially when Americans have debts of their own to worry about. In reality, the magnitude of the national debt has very real and very powerful effects on Americans’ personal finances. Tax rates, interest rates, and inflation are just a few of the areas affected by the national debt that impact Americans on a personal level. Read on to learn more about the national debt, what it means for you, and why you should care.

Facts about the National Debt

To give you a better understanding of a mind-boggling concept, we’ll provide a few brief facts about the national debt. As of August 2009, the national debt amounted to just under $11.7 trillion, a figure that rises at an average of $3.8 billion per day. This makes the United States’ national debt the 22nd-largest in the world as a percentage of gross domestic product. Economists of all kinds have admonished government officials that the national debt will be the next great economic crisis if the government does not commit itself to long-term fiscal sustainability.

Why You Should Care

The national debt isn’t just the government’s problem. When the government goes into the red, they use your money, taxpayers’ money, to handle the mounting costs, which are already prohibitive. Currently, the government spends $452 billion annually on debt interest payments, and that money came or will soon come directly out of your pocket. The national debt also has a devastating ripple effect on the economy. Here are a few examples of how the national debt could impact you dramatically as an individual:

• Higher taxes. The government simply cannot sustain the current disparity between how much it is spending and how much it is taking in with tax revenue. In other words, to avoid going completely broke, the government will have no choice but to raise taxes or drastically reduce spending. If past performance is any indication, the former is far more likely, which means you’ll be paying higher taxes for a long, long time.

• Reduced benefits/programs. If the government decides to attack the national debt by curtailing spending, government benefits (e.g., Social Security) may be reduced significantly. Programs will also be cut, which could affect anything from federal student financial aid to Medicare.

• Higher interest rates. Rising national debt will eventually result in the reluctance of investors and foreign governments to purchase Treasury bonds, thereby forcing interest rates to rise. That means that you will pay more for your auto loan, home loan, credit cards, and all other lending products.

• A weak dollar. When the government gets frantic to pay off national debt, it tends to allow the value of the dollar plummet so it can repay its debt in cheaper dollars. This is bad news for consumers, as a weak dollar commonly results in rampant inflation.

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