Why is the Rising Debt a Concern in the Current Interest Rate Environment for the US?

The United States Government’s debt is the total amount of money that the federal government owes to its creditors. As of 2022, the national debt of the United States was over $31 trillion. This debt is the result of years of government spending that has exceeded the amount of revenue it has collected through taxes and other sources. Here, in this article we will be discussing some key questions regarding US Govt’s debt- Who does the US Government owe the debt to? Why is the rising debt a concern and How can this debt be reduced?

The US National Debt:

The Debt of the US Government as a % of its GDP is constantly rising. As per recent data, the GDP of the US in 2021 is $23 Trillion against the US Government’s current debt of $31 Trillion resulting in Debt to GDP ratio of over 130%.
In Contrast, India’s Debt to GDP ratio at the end of 2021 was 89%, which is expected to reach 84% by the end of 2022.

Who Does the US Government Owe the Debt To?

Fed and Government accounts comprise government agencies like the Social Security Trust which is the largest holder of the US Debt- holding more than $2.75 trillion.
The Military Retirement Fund holds a debt of $1.18 trillion with the US Government.
Foreign Governments are another major debt holder- Holding treasury notes, bills, and bonds of the US Government.

How Does this Debt Increase?

For any government, there is a budget, where the government plans to allocate funds which will be the expenditure of the government and estimates the revenue like taxes & other non-taxes sources of revenue.
The Government needs to balance the expenditure and income. If in case expenditure of the government exceeds its revenue, there is a deficit, and to finance the same, the government needs to raise funds.
In the last few years, the government’s debt has increased due to Covid as the government needs to give stimulus to businesses and relief packages.
Also in the case of the low-interest rates scenario which we witnessed during the Covid pandemic period, the government took the low-cost debt to fund the various plans and policies.

Why Rising Debt in the Current Environment is Bad?

When the US Federal Reserve indicated that they will start Quantitative Easing Tapering, the interest rate in the US was almost around 0%. At this time, there was no incremental cost for the US concerning interest rates.
But when inflation began to rise and interest rates started rising, then the US Government need to pay the interest rates on the debt here, so that is how the indication of the interest rate of the entire banking system happens.
It simply means that as the interest rate rises, the US government needs to pay the additional cost of debt repayment.
As per the current debt of $31 trillion, the US Government will need to pay around $1 trillion per annum as interest rates in the case of a 4% interest rate.

How Can this debt be reduced?

There are 4 ways through which the US Government can reduce the debt levels, they are:

Cut Spending: The government needs to cut down on its expenses.
Increase Taxes: Increase in taxes will lead to growth in revenue and ultimately will cover the deficit.
Driving Economic Growth Faster:
Printing Money: This method can have its backdrop as it will lead to an increase in liquidity and further which will lead to a high inflationary situation.

What’s the Way Ahead?

The Economist and Analysts believe that in the longer term, the US Federal Reserve or the US Government is expecting that economic growth will outpace debt growth.
And in case the high inflation conditions stabilize or reduce then there will be another cycle of quantitative easing (which might be less aggressive than the Covid pandemic), which will reduce the interest bills and economic growth recovery can be on a better trajectory.
The US Government might lead by cutting expenses and rising taxes which is less likely to happen due to political scenario.

Conclusion:

The rising national debt is a concern because it can lead to higher interest rates, inflation, and other economic problems. The government needs to manage its debt responsibly and work towards reducing it over time.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.