Why does the United States' national debt matter?

Question

This might sound like a naive question, but I mean it quite honestly (please be aware that I am merely a high school student): Why does the United States' government debt matter? To be sure, based on political affiliation there are different degrees of opinion as to how urgent the problem is, but few seem to contest that the ballooning national debt is at least somewhat a concern.

I must confess, I don't quite get it. Given that the United States is so powerful, can't the government just keep borrowing from other countries? (And then just pay off the debt to Country A with more borrowing from Country B, etc., etc.?) Why can't the United States do that forever? Is there really a legitimate danger that other countries will get scared to lend us money (I'm assuming that's the concern about large debt)?

I know other people have asked questions about government debt on this site before, but I haven't been able to find an answer that squarely addresses my present concern, so I thought I'd share this question with you all. Any help is greatly appreciated.

Answer 1

Government debt generally (not just for US) matters (but is not necessary a problem) for country's economy for several reasons:

1. The most obvious one, generally speaking, debt is not just free money. You have to pay interest rate on debt which costs money that could be otherwise put to other uses. For example according to the US. Treasury the interest costs of US debt in 2019 were almost 600 billion dollars. Now thats not much compared to the size of US economy, but it is not trivial amount as well. Also, this cost would increase with the size of government debt, so even though at current level the debt costs for US are not that large (relative to economy size), if US government debt would continue to increase its debt at rate that outpaces economic growth then eventually this would became a problem.

2. Having large government debt limits government ability to stimulate economy during recession. There are limits on how much government can borrow as pointed out by @Giskard in his comments. In recession it usually is optimal for government to run deficit to stimulate the economy, but that can be only done if there are people willing to borrow it enough money. Maybe borrowing from other countries could be affected by US soft power (that is question for political scientists) but most of the US debt is own by private people/investors (see here). Generally if people will think that likelihood of US to monetize or default on its debt is high they will be reluctant to lend more money.

3. Connected to the previous points, if debt to GDP is so high government cant raise enough revenue to pay for interest and nobody is willing to borrow US more, it has to either monetize its debt or default on it. Monetizing debt (creating new US dollars to pay for it) could potentially lead to high inflation, and while little bit of inflation is good for an economy high inflation rates can be disastrous. If US would potentially default on debt it would restrict the US ability borrow in future (however, note that at current level of debt to GDP US is nowhere near a point where this would be a concern. US bonds have still very high rating meaning markets think the probability of US default is incredibly small - in fact US bonds are still often used as an example of risk-free asset).
4. Governments and businesses are essentially competing for borrowing up peoples savings. Large government borrowing might decrease the amount that private business and individuals can borrow to fund their projects. Even when government debt is sustainable in the sense that debt to GDP ratio is stable, from social welfare perspective having large government debt can be bad, especially if you think that private sector could invest the money more efficiently (See Blanchard et al Macroeconomics, an European perspective for more discussion of this). This does not seem to be huge problem in the present for US because low interest rates indicate excess of savings, but it could be problem in future or at higher levels of debt to GDP.

Note that this list is not necessary exclusive, but I think it provides overview of main points that could cause economists to worry.

Also note, none of the above implies that gov. debt is necessary a bad thing. Depending on situation there is always some optimal level of public debt to GDP ratio (and this optimum in most cases is above 0). However, it is also not sustainable to have debt that is not on a stable path (debt that grows faster than the economy), and even sustainable levels of debt put drain on the economy unless the debt is used on projects that objectively have the highest marginal rate of return which is probably true for some of the gov. spending but its very unlikely to hold for all of it.

Furthermore, I don’t know many economists who would say that current level of debt to GDP in US is huge problem, rather many economists are worried that even when US economy is as strong as it is now, US gov keeps the debt to GDP more or less constant instead of trying to reduce it now so there is more fiscal space for dealing with next crisis. Most of those economists that worry about US debt do so not because of its size now but because of worry that it will increase to more unsustainable levels in the future if US gov. debt to GDP continues to increase.

Answer 2

Generally speaking, running up debt becomes a problem when your creditors no longer believe the debt can be serviced. For instance, an individual could keep running up credit card debt as long as they have the income to support the monthly payments. There are two main factors that affect the borrower's ability to keep this arrangement going. Interest rates remaining low and the individual's income stream. This is no different for countries.

However, what makes the US much different than other countries is they issue the world's reserve currency. The Petrodollar is what allows this to happen. The Saudi's have agreed to only accept US dollars for the sale of their oil. Oil is a global commodity that every industrial country needs and therefore to purchase it on the global market, they need USD to buy oil. Therefore, there is a global demand for USD.

That is not the case for any other country. Most other countries are subjected to traditional market forces when it comes to their own currency and their own debt instruments. That places a natural ceiling on how much they can borrow.

Should the US lose its reserve currency status, it would become very apparent that the current levels of debt do in fact matter. Interest rates would rise dramatically and cause a severe recession.