The towering $32 trillion national debt of the United States, a record-breaking figure largely fueled by pandemic-induced spending, may not be as catastrophic as it appears. Despite the alarming numbers, experts assert that there are prevalent misconceptions about the country’s surging debt pile, which could paint a more ominous picture than reality. The recent calculation by the Congressional Budget Office projecting the debt load to reach a staggering $50 trillion within the next decade has undoubtedly stirred anxiety, but understanding the nuances of these numbers is vital.
Economists caution that while the debt issue could potentially lead to future problems given the current rate of spending, it’s essential to note that nations seldom completely pay down large debt balances. As Nobel economist Paul Krugman points out, this is evident in cases like Great Britain, which still carries debts from the Napoleonic wars. Furthermore, it’s important to understand that the $32 trillion debt does not need to be paid off in its entirety, but rather the interest on the debt and the principal of maturing government bonds need to be serviced.
Debunking Misconceptions Surrounding US’s $32 Trillion Debt
Despite the US national debt surpassing $32 trillion for the first time, experts argue that the situation may not be as dire as it appears. Economists suggest the country’s debt pile may seem more alarming due to common misconceptions surrounding the issue. Here are the top five misconceptions debunked.
1. The US Needs to Repay $32 Trillion
Contrary to popular belief, the US is not tasked with repaying the full $32 trillion debt. Instead, the country is responsible for paying the interest on its debt and the principal of maturing government bonds. Notably, it only cost the US $395 billion to service its debt last year, approximately 1% of its GDP. However, economists warn of potentially soaring debt servicing costs in the future due to the current rate of spending.
2. The Current Debt Level is Excessive
The public debt balance should be evaluated in relation to GDP. With a debt-to-GDP ratio of 97% last year, the US stayed below a crucial 100% threshold. Mark Zandi, the chief economist at Moody’s Analytics, argues that the absolute figure of $32 trillion is less significant when considering the resources available to service the debt.
3. Debt is Detrimental for the US Economy
Contrary to common belief, debt can be beneficial for the economy as it enables the government to fund critical functions and significant investments such as climate change initiatives and infrastructure. Zandi asserts that government borrowing is often a desirable and appropriate financing mechanism due to the long-term investments it facilitates in the economy.
4. Immediate Debt Repayment Prevents a Crisis
While the current spending rate may forecast trouble ahead, the US isn’t at immediate risk of a debt crisis. Zandi suggests that the country can alleviate concerns by moderating spending in relation to GDP and the current interest rate or by boosting economic growth. The Atlanta Fed predicts a 5% GDP growth during the third quarter, indicating that the US economy is growing too rapidly for a debt crisis to occur.
5. US’s Debt Problem is Unique
Debt accumulation is a global issue, with countries like China and Middle Eastern nations also facing potential debt crises. According to International Monetary Fund economists, the global debt balance is expected to trend upwards in the coming years.
Takeaways
While the US’s $32 trillion debt seems daunting, it’s critical to understand the broader context and debunk the common misconceptions. It’s not about the absolute debt figure but what it represents in relation to the GDP and the resources available to service it. Furthermore, debt can be a useful tool for financing important government functions and investments. Finally, the US’s debt situation is not unique but part of a broader global trend. Policymakers should focus on sustainable spending and growth strategies to prevent potential debt crises.
