Name: What Are the Dangers of Too Much Debt?
Uploaded: 2016-09-30T00:00:07.000Z
Duration: 3 min 8 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

As of 2011, the federal government owes $10.1 trillion to people, corporations, and foreign

governments and another $4.6 trillion to the Social Security Trust Fund. This doesn’t

The imperative

count an additional $50 trillion or more that the government has promised to current and

future Social Security and Medicare recipients that it will not have the money to pay.

Let’s ignore unfunded Social Security and Medicare obligations and just focus on the

official debt. What does it mean for the government to carry this much debt? The interest rate

the government pays on this debt is currently about 3 percent. That means that this year

the government will rack up $440 billion in interest charges alone.

According to the Congressional Research Service, the Iraq and Afghanistan wars cost about $140

billion per year. That is less than one-third the amount of money the government spends

on interest on the debt. Remember that the government must go to financial

markets to borrow, just like everyone else. So the interest rate the government pays on

the debt is determined by market forces. Today, the interest rate that the government pays

on its debt is the lowest that it’s been since the 1960s. In fact, just three years

ago the interest rate was 50 percent higher than it is today.

What would happen if the interest rate the government had to pay on its debt rose? At

the current debt level, a 1 percentage point increase in the interest rate would cost the

government an additional $147 billion a year in interest charges. That’s more than the

annual cost of the Iraq and Afghanistan wars. In fact, comparing the government’s annual

interest expense to the annual cost of all the wars the U.S. has fought, we see that

the interest rate on the debt costs us more than half of what World War II cost annually.

At the time, World War II was the costliest effort the government had ever undertaken.

Three years ago the government was paying a 4 percent interest rate. Ten years ago,

it was paying a 6 percent interest rate. Twenty years ago it was paying an 8 percent interest

rate. If the interest rate rises to 6 percent again—which historically is not only likely

but virtually inevitable—the interest charges the government accrues will equal the annual

cost of World War II. If interest rates rise to 8 percent, a level we saw only a generation

ago, the amount of interest the government will pay each year will be the equivalent

of waging all the wars it has ever waged combined. There are only two direct consequences of

debt: the principle payments and the interest expense. Other consequences flow from these.

The more the government pays in interest, the less able it is to provide services that

people need. This means that the government needs to take advantage of low interest rates

by paying down as much of the national debt as it can, while there’s still time.