What Are We Really Going to Do about the National Debt?

What the National Debt Means for Your Walletus-bonds-579By: Benjamin Gran

Many Americans are concerned about the national debt. The United States government has borrowed over $14 trillion (as of June 29, 2011), placing America as the #12 highest national debt in the world. Some financial experts are starting to raise questions about just how we as a country intend to pay it all back.

On April 18, 2011, the rating agency Standard & Poor's changed the U.S. credit outlook to "negative," indicating that the United States government was becoming less creditworthy. In July, another rating agency, Moody's, warned that it would cut the U.S. government's AAA credit rating if the government misses making any debt payments (this is kind of like an individual's credit score decreasing because of missed payments).

What Does the National Debt Means for Your Wallet?

Clearly, the U.S. government (and by extension, all U.S. taxpayers) has been living beyond its means. But how much longer can it continue? And if we don't reduce our national debt, how bad will the consequences be for individual Americans?

Will interest rates go up, making it harder for Americans to qualify for home loans and borrow money for college?

Will the U.S. dollar lose value against other currencies, making it harder for Americans to afford to travel overseas or buy imported goods like Japanese cars, Italian wine and Chinese electronics?

Will we all be paying much higher taxes for the rest of our lives to pay off the debt? Will our parents and grandparents' Social Security and Medicare benefits be slashed to make up for the shortfall?

According to a recent article in the Atlantic Monthly, the answer is complicated - but perhaps reassuring to "average Americans." The U.S. probably will not default on its national debt; we're going to keep making our payments one way or another.

Here's how it works: the U.S. government borrows money by selling bonds - a promise to repay money, with interest, after a certain period of time. If you've ever owned a savings bond, you've loaned money to the government. Most U.S. bonds are owned by institutional investors (like pension funds, 401(k) plans, etc.) and foreign countries (especially China, Japan and the United Kingdom - in fact, foreign countries own 47 percent of the U.S. national debt).

How Will Our Government Deal with the Debt Problem?

According to experts interviewed by the Atlantic, the U.S. government is not going to fail to repay our national debt, and they're not going to make dramatic cuts in benefits or hike taxes on middle-class Americans.

Instead, the problem of America's national debt is likely to be solved by "stealth default" and "financial repression." That's a fancy way of saying the U.S. government is going to slowly change the rules and twist the arms of its bondholders to achieve more favorable repayment.

How can they (or, "we") do this? Three ways:

Inflation: The U.S. government has the ability to print more money to increase inflation, which makes every dollar worth a little less and makes it cheaper for the government to pay off its debt. This is bad for consumers who have to pay higher prices with a weaker dollar, but is possibly good for the country overall.

: The U.S. government can change the rules as to how long various bondholders need to hold on to their U.S. bonds, or can require banks to buy and hold a larger share of U.S. bonds. That would keep the global bond market from running into a panicked "sell-off" of U.S. Treasuries.

Tax laws
: The U.S. government can follow the example of New Zealand in 1932 when that country changed its tax laws to get its bondholders to "voluntarily" convert their short-term bonds to longer-term bonds at a lower interest rate (meaning that the bondholders agreed to get paid less over the long term). Although this seemed like a bad deal for the bondholders, they had no choice - the government would charge a higher tax rate on any bondholders who didn't take the deal.

Americans are fortunate to have a government and a currency (the U.S. dollar) that is so big and so deeply engrained into the global financial system. It's like the old saying, "If you owe the bank $50,000, the bank owns you. If you owe the bank $50 million, you own the bank." In the same way, the U.S. government is too big and too powerful to fail.

People are right to be concerned about the national debt, but the biggest challenges are likely to be resolved without most Americans noticing a big difference in their standard of living. If only we all had the power to print more money to pay off our debts…

No matter how much you own or owe, Quizzle.com offers great tools and resources to improve your personal finances. With Quizzle, you can get out of debt faster, improve your credit, and make better-informed financial choices for a more prosperous financial future.

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