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How Does the National Debt Affect My Personal Debt?

In a lot more ways than you think!

The U.S. national debt is ticking up every second, faster than anyone can actually count. It currently stands at more than 26 and a half trillion dollars — well beyond the wildest dreams of even Dr. Evil.

But what does all that money even mean? Humans can’t conceptualize how much a trillion of anything is, never mind nearly 27 times that amount. Besides, does the national debt actually affect you or me in any real way?

You bet your ass it does.

Alongside Stephen Brincks, a finance professor at San Diego State University’s Fowler College of Business, we’ve racked up a crushing debt’s worth of answers.

Wait a minute, that $26.5 trillion actually affects my own finances?

Sure. You’re not exactly on the hook for it, but the way that our national debt is financed has wide-ranging knock-on effects on us all.

Like what?

The main way that the national debt affects your personal debt is through interest rates, according to Brincks. Particularly mortgage interest rates, but also the rates for car loans, credit cards and small-business loans — really any sort of borrowing you might do from a bank.

What’s interest rate got to do with it?

“Basically, the interest rate on federal debt is a building block for the interest rate on any other type of debt,” Brincks says. “So changes in federal interest rates impact pretty much any type of loan you take out and how much you’re going to pay for that loan.”

Why are bank interest rates tied to federal interest rates?

The largest debt market in the world is U.S. Treasury securities. These include Treasury bonds, Treasury notes, Treasury bills and other types of investment vehicles. When the federal government spends more than it earns at any given time, it finances that deficit by issuing such things — think of it as a Band-Aid-like substitute for raising taxes (which is much harder for a politician to do than to spend money).

The thing is, Treasury bonds are competing for investors’ demand in the marketplace against other investments like home mortgage bonds, based on the rate of return they’ll pay out. Treasury bonds are seen by investors around the world as a risk-free security (since the Treasury can just print money if it really needs to). So if investors can get a satisfactory return on Treasury bonds, they may not want to buy mortgage bonds — there’s a risk that people will default on these, and investors won’t get their money back.

Thus, if the interest rate on Treasury notes increases in order to entice investors to buy them, it’s going to make mortgage bonds less attractive. And so, over the decades, 30-year mortgage rates have closely followed the 10-year Treasury yield as two very close lines on a graph, as they compete for investors’ dollars.

So we’ve actually been experiencing this for years?

Oh yeah — you’ve been experiencing it your entire lifetime. Just over the past 40 years, government bond yields and mortgage interest rates have experienced the same downward trend, for example.

Federal debt skyrockets but interest rates go down?

Yeah. Things are weird right now, and we’re kind of in uncharted waters, Brincks says. In conventional economics, normally you have to pay back debt, which means the government would either have to rein in spending or increase taxes. But there have been so many deflationary forces around the world that governments have been running large budget deficits for a long time with very few consequences. Brincks says that 40 years ago, a deficit this size would have definitely led to higher interest rates. But instead, they’ve been extremely low for the past decade.

Why’s that?

“Typically, if government debt goes up, that should put pressure on interest rates to go up because you have to raise them to attract investor demand,” Brincks says. But that relationship hasn’t actually held in practice for about a decade or so.

So, things are… good?

For the moment they are, because not having to raise taxes or cut spending has had a positive impact on the economy. But, Brincks says, whether you can keep doing this indefinitely is an open question.

Does the debt not really matter, then?

Actually, it really does matter — it determines interest rates, but it also affects us in other ways.

How else do those trillions of federal debt affect me?

The government pays higher yields to finance the debt, so they’re taking money that might otherwise have gone toward, well, take your pick: fixing roads, providing education, maintaining public land, adjudicating our laws — every big and little thing a government does for its people (y’know, ordinarily). This is another way of saying that more borrowing gradually degrades everyone’s quality of life.

Anything else I should be infuriated by?

Oh yeah, always. There’s a more complicated and contentious economic theory called crowding out, “which is the idea that if the government issues large amounts of debt it’s going to soak up private investor demand and the result is there’s going to be less money available to invest in corporate bonds, mortgage bonds or other types of debt — and that could raise interest rates on those types of debt,” Brincks says.

And that takes money away from the private sector and puts it into the government, right? Is that such a bad thing (again, ordinarily)?

Well, it forces private industry to increase the yields on their bonds in order to compete. To pay out that higher yield, companies have to raise prices on what they sell and provide, which leads to inflation.

In theory then, the less the government borrows, the cheaper a mortgage could be?

Yes. You could say it increases your purchasing power, and with less interest you have to pay, it would allow you to borrow more money. Now, think that through in the opposite direction: More government debt means that fewer people qualify for mortgages. As if that’s not bad enough, this erosion of purchasing power goes on to depress home prices due to less demand. Which means that the value of a homeowner’s property goes down. Huge net negative overall.

What can any of us do about the national debt, then?

Ideally, you’d ask politicians to do a better job of thinking about how money can be spent. Brincks says it’s likely at some point that concerns will rise over the amount of debt the U.S. has, and that it’ll trigger higher interest rates that will have a hugely negative effect on the economy. But right now? That’s the trillion-dollar question. Do you throw more dollars into the furnace to try and save businesses from going bankrupt and people from losing their jobs at the cost of increasing the debt to where there are negative consequences?

“I don’t think even economists fully understand what would be the perfect policy to have,” Brincks says. “Because we’re in very uncharted waters when it comes to having a national debt that’s this high and yet it hasn’t impacted inflation or interest rates that much.” There are just so many moving parts to an economy.

Overall, then, the federal debt really is messing with my loans?

That’s right. Interest rates move for all sorts of reasons, but they definitely track with the federal government’s interest rates, based on politicians’ indifference or inability to rein in spending. One more thing to blame them for!

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