Imagine you’re a recent college graduate, excited about starting your career. But there’s a problem: you’re weighed down by a massive student debt that will take years to pay off. You’re not alone — millions of Americans are in the same boat, struggling to make ends meet while managing their debt. Now picture the US government, which is also deep in debt, with a debt-to-GDP ratio higher than at any point since World War II. Unlike you, though, the government doesn’t have a plan to pay off its debt. Instead, it keeps borrowing more money and printing more to finance its spending.
What does all this mean for you and your future? How will it impact your living standards, taxes, public services, and opportunities? And what if the US dollar loses its status as the world’s reserve currency? What kind of effect will that have on the US economy and its place in the world? In this post, we’ll explore these questions as we examine whether high debt levels will ultimately become a burden on future generations.
The US debt-to-GDP ratio reached 129% in 2022, its highest since World War II. Some experts argue this debt is unsustainable, leading to negative consequences for future generations through higher taxes or reduced public services. Others maintain that high debt levels are manageable if the government borrows at low interest rates and stimulates economic growth and social welfare. They also argue that governments can print more money without causing inflation or losing credibility. We contend that high debt levels do burden future generations, necessitating fiscal reforms in the US and other developed nations to reduce debt-to-GDP ratios and ensure long-term economic stability and prosperity.
Rising Interest Payments and Tough Choices Ahead
A primary reason for high debt levels burdening future generations is increased future interest payments, leaving less fiscal space for other spending priorities. The Congressional Budget Office reports that net interest payments on federal debt were $345 billion in 2021 (1.5% of GDP) and are projected to rise to $914 billion (3% of GDP) by 2031. The Office of Management and Budget (OMB) estimates that net interest payments on the debt will total $395.5 billion this fiscal year (2023), or 6.8% of all federal outlays. Consequently, less funding will be available for education, healthcare, infrastructure, defense, and other public goods and services benefiting current and future generations.
To avoid this, the government must either raise revenues via tax reforms or cut spending on wasteful or inefficient programs. However, both options are politically challenging and socially painful. Raising taxes could dampen economic activity and impact low- and middle-income households, while cutting spending could undermine public investment and social protection. Furthermore, both options may face resistance from influential interest groups and ideological factions.
Some argue that higher taxes or reduced public services aren’t inevitable if the government can borrow at low interest rates and grow its economy faster than its debt. This assumption posits that the debt-to-GDP ratio isn’t a relevant indicator of fiscal sustainability if the nominal interest rate is lower than the nominal growth rate of the economy (r < g). Under this condition, the government can run primary deficits indefinitely without increasing its debt-to-GDP ratio.
However, this argument is unrealistic and risky, as it assumes indefinitely low interest rates and unaffected economic growth due to external shocks or structural factors. In reality, interest rates can change rapidly and unpredictably because of market expectations, inflation pressures, or global events. For example, in 2013, when the Federal Reserve announced plans to taper its quantitative easing program, interest rates spiked over 100 basis points in a few months (“taper tantrum”). Similarly, in 2018–2019, amidst US-China trade tensions, the yield on the 10-year Treasury note fell more than 150 basis points due to increased demand for safe assets.
Furthermore, economic growth can be slow and uneven due to demographic trends, productivity slowdowns, or environmental challenges. For instance, the 2020–2021 coronavirus pandemic led to a 3.5% contraction in US real GDP. Although it rebounded by 5.7% in 2021, it remains below pre-pandemic levels and faces uncertainties due to new virus variants and supply chain disruptions.
Therefore, relying on r < g to justify high debt levels is not a prudent fiscal policy strategy, as it exposes the government to potential interest rate shocks and growth disappointments that could worsen debt dynamics and force abrupt fiscal adjustments.
The Price of Printing Money and Threats to Living Standards
Another reason high debt levels burden future generations is that printing more money to finance government spending results in inflation and lower living standards. Increasing the money supply reduces its value, leading to higher prices for goods and services. The Bureau of Labor Statistics reported a 7% increase in the consumer price index (CPI) in December 2022 compared to a year ago, marking the highest annual inflation rate since 1982. Consequently, a basket of goods and services costing $100 in December 2021 would cost $107 in December 2022, diminishing the real value of wages, savings, pensions, and social benefits for current and future generations.
Inflation negatively impacts economic activity and stability, creating uncertainty and market distortions. For instance, it discourages saving and investing by eroding the real return on assets. Additionally, inflation raises the cost of borrowing and servicing debt by increasing nominal interest rates. It affects domestic producers’ competitiveness by making their products more expensive relative to foreign ones and diminishes consumers’ purchasing power by reducing their income’s sufficiency to buy goods and services.
Some argue that printing more money isn’t inflationary as long as there’s enough economic slack and demand for goods and services. They also suggest that mild inflation is desirable, stimulating economic activity and reducing debt’s real value. This argument is based on modern monetary theory (MMT), which posits that sovereign governments issuing their own currency can never run out of money or default on their debt. MMT proponents assert that governments can create money for spending without worrying about deficits or debt levels, provided they control inflation through taxation or other means.
However, this argument is flawed and dangerous, as it disregards the potential costs of inflation for consumers, producers, investors, savers, and creditors. It also overlooks that inflation expectations can become unanchored and difficult to control once they exceed a certain level. For instance, during the 1970s and early 1980s, when the US faced double-digit inflation rates due to expansionary fiscal and monetary policies, it took a severe recession and tight monetary policy from the Federal Reserve to moderate inflation. Additionally, printing more money doesn’t guarantee economic growth or social welfare, as outcomes depend on how money is spent and distributed. Printing money to finance wasteful or corrupt spending could negatively impact productivity and equity.
Reserve Status at Risk and Cycle of Debt and Instability
A third reason high debt levels burden future generations is that losing the US dollar’s reserve currency status would undermine its credibility, increase borrowing costs, and create a vicious cycle of debt and instability. The US dollar’s reserve currency status provides a unique advantage in the global financial system, enabling it to borrow cheaply and easily from other countries and regions. As of November 2021, foreign holders owned $7.3 trillion of the total $28.8 trillion federal debt. The largest foreign creditors were Japan, China, and the United Kingdom. These countries and regions can influence US interest rates by trading US Treasuries, considered safe and liquid assets.
However, this advantage could be lost if other countries lose confidence in the US dollar or find alternative currencies or assets for their reserves. For example, if China diversifies its reserves away from US dollars or adopts its own currency for international trade and investment, demand for US dollars could decrease, leading to its depreciation against other currencies. Since 2005, China has been steadily diversifying its reserves from the US dollar to mitigate exposure to its fluctuations and to promote the renminbi as an alternative global reserve currency.
A weakened reserve currency status could also impact the US’s political and military influence, reducing its ability to impose sanctions or enforce agreements with other countries. This could diminish US leverage and influence globally. Severe economic and geopolitical implications would arise from losing the US dollar’s reserve currency status, making it harder and more expensive for the US to finance its debt and spending while reducing its power and prestige globally.
Additionally, Brazil, Russia, India, China, and South Africa are exploring the idea of creating a common currency to challenge the dominance of the US dollar. This development could create more instability and uncertainty in the global financial system, disrupting established norms and arrangements governing international trade and investment.
In conclusion, high debt levels will ultimately burden future generations, as they will have to pay it off through higher taxes or reduced public services, or face inflation and lower living standards if the government prints more money to finance spending. Furthermore, losing the US dollar’s reserve currency status would undermine its credibility and increase borrowing costs, creating a vicious cycle of debt and instability.
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