More Trouble With Debt

Another problem many economists see with an ever-increasing national debt is that the federal government must compete with other privately issued securities. (Think company stocks and bonds.) Money that goes into U.S. treasury notes does NOT go into private companies that would hopefully invest in growth and job creation. Theoretically, this would slow the economy down. We would then see a drop in GDP (gross domestic product), the measure most commonly used to assess our nation’s economic well-being. GDP measures the value of all goods and services produced in a nation in one year. When GDP drops, that means factories and businesses are not producing as much and therefore need fewer workers, thus leading to higher unemployment. As we all know, this can lead to a vicious cycle, as unemployed workers have no income with which to buy goods and services, so even fewer goods and services will be produced, meaning even more workers are laid off, and on it goes. When GDP drops for two consecutive quarters, we are in a recession. That, of course, is where we are now. Some would even argue that we are in the beginning of a depression, but that is the subject of a future post.

Not only can federal borrowing slow economic growth, it can also raise interest rates, which eventually slows economic growth as well. If the government is borrowing lots of money, and so are businesses and individuals, there is a very high demand for credit. The Law of Demand kicks in. When the demand for something goes up, so does the price. The price for credit is interest. So, more demand for credit leads to higher interest rates. This definitely affects anyone who wishes to buy expensive goods, such as a house or a car. In fact, higher interest rates may just make that house unaffordable. If fewer houses are selling, there will be less need for carpenters, supplies, and all the people that provide supplies. Again, the result is lower GDP and higher unemployment.

Not all economists agree that the government competes with private industry, but it makes sense to me.

So, what happens if there is more demand for credit than there are people who are willing to provide it? Well, then the government must go outside the country to find people who will buy treasury bonds and notes. That is just what they have done, so that we now are in debt to China to the tune of over 700 billion dollars and Japan for over 600 billion. My next post looks at the possible dangers associated with this type of debt.