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The $32 trillion U.S. debt mountain may not be as bad as it seems.
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According to experts, there are some misconceptions about the national debt.
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However, economists believe that debt problems could arise in the future, given the current rate of spending.
America’s huge mountain of debt may seem like a terrible problem for the country, but there are some common misconceptions, experts say, about what the growing debt buildup means.
The national debt just topped $32 trillion for the first time, thanks to years of frenzied spending following the pandemic. And that debt load will likely rise even higher, potentially reaching $50 trillion within the next 10 years, according to a projection from the Congressional Budget Office.
This could spell trouble for the US, especially in the context of rising interest rates. But experts say there are misconceptions surrounding America’s debt problem that could make the nation’s debt load seem more dire than it actually is.
Here are five misconceptions about the country’s debt burden:
1. The United States must repay $32 trillion
Technically, the United States must pay interest on its debt and the principal of maturing government bonds. According to Nobel economist Paul Krugman, it is actually rare for nations to repay their debt in full after accumulating large balances. This is the case of Great Britain, which still maintains the debts contracted during the Napoleonic wars.
Debt servicing cost the United States just $395 billion last year, according to the Office of Management and Budget. This is about 1% of last year’s GDP.
However, economists say debt servicing costs could rise sharply in the coming years. Debt servicing could cost the government $663 billion this year, according to a CBO estimate, and there is also $7.6 trillion in government bonds set to mature over the next twelve months. This is about a third of the total balance, or a quarter of the entire American GDP.
2. The current debt balance is far too high
In fact, the balance of public debt must be evaluated in relation to GDP. The US debt-to-GDP ratio hovered around 97% last year, below the key threshold of 100%.
“[$32 trillion is] nonsense. It’s really in the context of GDP that the resources available to repay the interest on the principal payments on that debt,” according to Mark Zandi, chief economist at Moody’s Analytics. “A common mistake people make is quoting these big numbers, but they fail to recognize that there are really large numbers supporting that debt,” he added.
3. Debt is bad for the U.S. economy
Debt helps the government perform crucial functions. It also helps finance major investments such as climate change initiatives and the construction of new infrastructure, Zandi said.
“In the case of the government, the use of debt is a very appropriate and desirable way to finance a large part of its activities,” he added. “People are really concerned about the government borrowing, and that’s a mistake. We need the government to be out there borrowing money because of the long-term investments it’s making in our economy. “
4. The United States must repay its debt quickly to prevent a crisis
The United States is not at immediate risk of a debt crisis, although problems could be lurking in the future given the current rate of spending, Zandi said.
The United States can quell concerns among investors about the bond market by moderating its spending relative to GDP and the current level of interest rates, or by reviving economic growth. And some say the US is growing too fast to tip into a debt crisis now, with the Atlanta Fed forecasting 5% GDP growth during the third quarter.
5. America’s debt problem is unique
Rising debt levels are a global problem. China’s debt problems are now eating away at the nation’s real estate sector. Middle Eastern nations are also grappling with a debt crisis, and the global debt balance is likely to trend upward in the coming years, according to economists at the International Monetary Fund.
“This is more of a broader sovereign debt problem that is starting to develop. So I think this is a problem that, unless politicians change policy or the economy does much better than expected, is going to be a problem in future,” Zandi said.
Read the original article on Business Insider