Fears of a stock market crash are swirling as U.S. national debt climbed to $34 trillion for the first time in history. While it may seem unclear how rising national debt affects other financial mechanisms, it’s worth understanding just what it means and why it matters.
So, what exactly does $34 trillion in national debt mean for you?
Well, the U.S. entered the new year at a level of debt higher than ever. Indeed, at $34 trillion, the United States’ debt is 1.2 times its annual economic output, higher than the 1.1 ratio dating back to World War II.
Now, rising debt isn’t a new phenomenon. In fact, in many ways, it’s not something worth freaking out about. But it is still a problem.
The fact is that, over the course of U.S. history, the country typically spends more than its receives in revenue via taxes on a yearly basis. As such, the total amount of debt tends to climb, often at varying rates. In recent years, due to the Covid-19 pandemic and various healthcare initiatives, the U.S. has accrued debt at a faster-than-usual pace.
Typically, the main concern with rising debt are the payments associated with it. Ordinarily, interest rates are low so payments aren’t particularly burdensome. However, things are admittedly a bit different nowadays.
Indeed, after the Federal Reserve’s historically fast rate-hike cycle over the past two years or so, the rapid pace of debt growth has become a bit more concerning. This is in part why ratings agencies lowered the outlook on the U.S. credit rating from “stable” to “negative” back in September. While this was seemingly due to the annual debt ceiling crisis, it is also inherently reflects the danger of the rapid pace of debt accumulation, especially given higher interest rates.
While higher interest rates don’t change the cost of debt already accrued, they do affect the interest on future debt, which hasn’t slowed down despite rapidly changing economic circumstances.
Stock Market Crash Fears Swirl as Economists Weigh In on U.S. Debt Record
The issues of rising debt have more to do with the deficit than the overall debt level itself. Indeed, the deficit — which measures the yearly differential between spending and revenue — remains elevated, to which some economists argue it need not be.
Reasonably so, high interest rates, low unemployment and pesky inflation reduce justification for deficit spending.
At the end of the day, the high annual deficit is a political issue more than an economic one. The two U.S. political parties disagree over the best methodology to lower the deficit and compromises are far and few between. The left wants to raise additional revenue by taxing the wealthy, while the right prefers to cut Medicaid and other federal programs. The government almost shut down just last year because these two sides were unable to do something as fundamentally necessary as raising the debt ceiling.
Not everyone agrees over just how bad rising debt is, but most agree it’s not good.
“Looking ahead, debt will continue to skyrocket as the Treasury expects to borrow nearly $1 trillion more by the end of March,” said Peterson Foundation Chief Executive Michael Peterson. “Adding trillion after trillion in debt, year after year, should be a flashing red warning sign to any policymaker who cares about the future of our country.”
The level of debt hasn’t hampered economic growth in any tangible way, at least thus far. When it will devolve into something more impactful, however, remains to be seen.
“It could mean spikes in interest rates, it could mean a recession that leads to lots more unemployment. It could lead to another bout of inflation or weird going on with consumer prices —several of which are things that we’ve experienced just in the past few years,” said Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
