The U.S. government’s spending habits have reached a new record, and it’s currently more than $34.5 trillion in debt. But owing money is nothing new — it’s a part of the country’s historical narrative. The U.S. has been in debt since its inception, borrowing $75 million from domestic investors and the French government during the American Revolutionary War.
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But how did we get to $34.5 trillion, and why do Americans have to repay their loans when the government’s soaring debt remains unpaid? GOBankingRates spoke to financial experts who explained.
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Why the US Is in So Much Debt
“The U.S. government owes so much money because of the irresponsible fiscal policies that they currently have in place,” Les Rubin, founder of Main Street Economics, told us.
“In recent years, the government has spent more than what it has brought in through revenue and the deficits have accelerated consistently from 2001 until today when those deficits are now exceeding $2 trillion per year.”
He added, “We have a growing national debt that we owe to various countries, the Federal Reserve, various government agencies including Social Security and Medicare and private investors.”
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Personal Spending vs. Government Spending
According to Eric Mangold, founder of Argosy Wealth Management LLC, the government has an advantage when it comes to paying back loans.
“The biggest difference between personal spending and government spending is that when the government spends — or overspends — and accumulates debt, it has the ability to print more money.”
Mangold noted, “The everyday citizen can’t simply go to the nearest mint and ask for more money to be printed for them, but the government can. But the by-product is that ultimately when the government racks up more and more debt to nightmare levels, and they can’t print more money, at some point the tab needs to be paid.
“That tab usually comes in the form of higher taxes for all of us,” he added.
Repercussions If the US Defaults
Ever wonder what happens if the U.S. doesn’t repay its loans? Our economy would suffer, and “catastrophic consequences would result,” Rubin said.
“The value of the U.S. bonds would plummet dramatically, possibly to zero, ultimately with the result that many entities would become bankrupt by writing off substantial assets that would deplete their net worth,” he continued.
Rubin explained, “The government would not be paying the interest or principal on the national debt. A default would likely mean we couldn’t borrow more money, meaning the country would not be able to fund the operation of the government as well. This would likely lead to a collapse of the world economy and monetary system because the U.S. is so large and the staple of the world monetary system.”
Why the National Debt Is Alarming
According to Rubin, the increasing national debt has serious financial implications for Americans.
He went on to explain, “As the debt increases and interest rates rise, a more serious issue arises for people who borrow money and use credit cards. For example, as Americans are looking to purchase homes, the interest rate on mortgages has increased dramatically as those interest rates are tied to the rate on the national debt. This makes purchasing a home unattainable for some Americans, adding additional stressors.”
Rubin added, “Ultimately, interest rates influence what we pay, but also impact the future of the national debt. The country’s interest expense has risen to over $1 trillion per year, making it harder and harder for the government to avoid deficits and pay back these loans. This is known as a Doom Loop — as debt increases and interest increases, it causes more debt and more interest, etc.”
Why Americans Have To Repay Loans If the Government Doesn’t
Americans work hard to pay off their mortgages, credit cards and car loans, so why isn’t the government making the national debt a priority?
“The government CAN pay their loans due to their unlimited ability to borrow — for now — or print more money, as long as other countries and investors will continue to buy our bonds,” Rubin said.
“However, if someday the country cannot borrow money, we will have to default, leading to severe consequences. I think of the U.S. debt as a Ponzi scheme since there is no source to pay the principal on the debt and interest except to borrow more money. The Ponzi scheme will collapse when people won’t buy our debt. When this happens, we will face economic catastrophe.”
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This article originally appeared on GOBankingRates.com: The US Debt Is at $34 Trillion: Why Are We Struggling To Pay Our Loans If the Government Can’t?
