Deficits and Future Generations

As of today, the outstanding national debt of the US government is roughly 12 trillion dollars.  That’s TRILLION, with twelve zeros.  The national debt is the accumulation of the annual overspending of the federal government (the excess of expenditures over tax revenue) since the founding of the republic in 1776.  With a GDP of roughly $14 trillion, it would take the entire output of the US economy for one year to pay off the National Debt.

Of course, each year that the federal government has a deficit of income over spending (the announced deficit for fiscal year 2009 alone was $1.4 trillion) the national debt rises.  Often I hear people criticizing the rising national debt because it “passes burdens to our children and our grandchildren.”  Ironically, the real burden of rising deficits and national debt isn’t the inter-generational transfer of wealth; it is the damage that these deficits cause for the present generation.

The debt has to be borrowed.  For example, the $1.4 trillion that we will overspend this year will have to be borrowed by selling US treasury bonds.  The projected additional $9 trillion of overspending that is estimated for the next ten years will also have to be borrowed.  This means that the Federal Government will enter the capital markets to finance nearly $12 trillion over the next decade.  As the government borrows more and more, this drives up interest rates and “crowds out” private companies who are trying to borrow money to engage in truly worthwhile business ventures.

In this way all workers, regardless of age, are denied employment opportunities in the private sector because the businesses that would have hired them couldn’t borrow the money they needed to create jobs.  The main “burden” of high national debt is not one that is passed on to future generations, but the burden of job losses and forgone prosperity that would have occurred immediately, if the government hadn’t sapped up available capital that would have grown private businesses.  Rather than burdening future generations, the debt damages the economy in the here and now.

Ironically, future generations are less burdened by the debt than might be generally imagined.  As the Federal Reserve “buys back” the government bonds that were created to finance the debt, this increases the money supply and causes inflation.  The government-created inflation allows future generations to pay interest on the debt in “cheaper” dollars.  As a “tongue in cheek” example, some day in the future a $40 trillion national debt won’t be such a big deal when a hamburger costs $5,000!  Hmmmm…come to think of it, my tongue isn’t in my cheek as much as I would have thought a few years ago.

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