Understanding the U.S. National Debt: Payment, Control, and Future
Does the U.S. actually have to pay a percentage of the 19 trillion dollar national debt? The answer depends on how one looks at it.
Interest Payments and Their Destination
Yes, interest is paid on the national debt. However, much of this interest goes to U.S. citizens who own government bonds. The U.S. government creates the money it uses to pay the interest, making the process somewhat circular. The money paid for interest is not "new" money in the sense that it costs the government something, but rather it is created and used to maintain face value payments to those holding government bonds.
For instance, the U.S. national debt does not constitute real spending in the traditional sense. Much of it is held in accounts at the Federal Reserve (Fed) and can be repaid at any time. This is a significant aspect to consider when discussing the debt.
Why Not Just Pay It Back and Stop Paying Interest?
One might wonder why not just pay back the debt and stop paying interest. However, this would be a complex and controversial move.
The government wants to control the amount of money in the economy, and using the national debt as a control mechanism is a significant tool. Excessive money in the economy can lead to inflation, which can be detrimental to the stability of the economy. Therefore, the government keeps the debt at a certain level to maintain interest rates and prevent inflation.
Moreover, the interest payments serve as an incentive for people to save money. When the government offers an interest payment on money deposited at the Fed, it encourages saving and can raise the interest rates. Higher interest rates generally mean more saving since people prefer to hold cash rather than leave it at a lower yielding account. This helps in regulating the money supply in the economy.
Can the Size of the Debt Be Controlled?
The size of the national debt is not fixed and can be influenced by government policies. Essentially, the government wants the debt to be at a certain size, and it can manipulate it according to its needs. This means that the national debt can expand or contract based on the government's economic strategies and goals.
Is the Size of the Debt a Source of Concern?
Despite the size and ongoing nature of the national debt, it is generally not a cause for worry. The interest payments are a normal part of the economy and are managed in a way that does not unnecessarily burden the government.
Debts Must Be Repaid
Debts must be repaid or serious issues such as a loss of trust and difficulty in financing in the future can arise. The amount that must be paid each year is referred to as 'interest.' Many U.S. bonds carry interest rates of 2%, 3%, 4%, or 5%, and interest must be paid annually. As the debt is constantly increasing due to new borrowings, much of the debt is never fully repaid but rather just rolled over into new debt.
In essence, understanding the U.S. national debt involves recognizing it as a tool for economic management, an inevitable part of economic growth, and a responsibility that must be upheld to maintain the trust and financial stability essential for a thriving economy.