The US national debt load surpassed $22 trillion on Monday, February 11, 2019, according to the Treasury Department. Just check out the US Debt Clock to see for yourself. It’s the first time that the total outstanding public debt has topped that threshold.
Additionally, a Treasury report estimated the total amount of debt issued during 2018 topped $1.3 trillion: the largest issuance of new debt since 2010.
Why Did the US National Debt Increase?
The recent acceleration in outstanding debt was driven by two recent legislative changes.
The first was the tax-reform law pushed by President Donald Trump and passed by the GOP. The law is projected to add about $1.5 trillion to the debt over the first 10 years it’s in effect.
As the GOP tax bill and massive spending agreement took hold, the budget deficit for the fiscal year 2018, which ran from October 2017 through September 2018, was 17% wider than 2017’s and totaled 3.9% of GDP. In total, the deficit in fiscal year 2018 hit $779 billion. The deficit measures the amount of revenue the government pulls in minus the government’s expenditures.
According to the Treasury, revenue grew by just 0.4% as spending grew by 3.2%.
The second was the large, bipartisan budget deal that passed Congress. The combination of slashed tax rates, lowering government revenue, and increased spending adds up to a higher debt load.
The Increase in the US Deficit is a Contradiction
The increase in the deficit contradicts President Trump and other official’s promise that the GOP tax bill would “pay for itself.”
According to official projections, the deficit is only going to grow larger from here on out. The Congressional Budget Office estimated that the budget deficit for 2019 will be just a hair under $1 trillion and will eclipse $1 trillion in 2020, the first deficit of that size since the depths of the financial crisis.
The increase is the wrong direction if the president wants to eliminate all of the US’s debt in eight years, as Trump promised he would do on the campaign trail.
Who Benefits from the New Tax Legislation?
Based on the evidence thus far, the only group benefiting from the legislation are corporations. Corporate tax revenue dropped 31% in fiscal year 2018 while personal income tax revenues ticked up 6.1%.
That’s just great. Corporations are getting a tax break while you are paying more.
No wonder your wallet or purse is feeling a little lighter these days, despite what many say is a robust economy.
Trump and many others believe that if companies are taxed less this will stimulate economic growth. However, in order for this to work the profits must be passed down to employees who will have more money to spend.
Unfortunately, this is not happening. Although the unemployment rate is at 4.0% as of January 2019, wages have barely budged since the 2009 financial crisis.
It’s clear that the legislation passed by the GOP favors corporations. If you don’t own your own business and are paying personal income tax, you are getting screwed.
Is the US Debt and Deficits Really Something to Worry About?
Traditionally, economists have warned that the high levels of government debt would cause problems for the US economy as private investment is crowded out by public debt.
But recently, progressive lawmakers, such as Rep. Alexandria Ocasio-Cortez, and some economists have started to latch on to modern monetary theory (MMT), an idea that posits the nominal amount of debt the US holds is not in and of itself an issue.
Rather, MMT adherents say that government spending and debt accumulation is constrained by tangible assets. So, if public indebtedness climbs with no effect on inflation, which seems to be the current case given the tame inflation levels in the US, the debt load is not posing a substantial threat to the economy.
This theory held by some economist and Rep. Alexandria Ocasio-Cortez is at odds with traditional thinking.
To put it bluntly, modern monetary theory is flawed.
Although, Dick Cheney said, “deficits don’t matter”, at some point in time they do.
Debt Must Be Repaid
Eventually, debt has to be repaid. Or, at a minimum, the creditor has to at least believe that the borrower has the capacity to repay the loan.
If the creditor believes there is a risk of default, the cost of borrowing goes up (with higher interest rates). Even worse, they may even cut your credit line.
It’s like a credit card.
If you have an outstanding balance and the interest rate goes up on your credit card, more of your money goes toward paying interest. It will take you longer to pay off your credit card.
If you need your credit card to make ends meet (your monthly expenses exceed your income) losing access to credit is problematic.
What Is the Conclusion?
So, how do the growing US debt and national deficit affect you?
If the national debt continues to rise, at some point, there will be fewer countries willing to buy US bonds, regardless of the interest rate.
The only purchaser will be the Federal Reserve. And this will cause inflation and a decline in the currency. If this happens, all the shiny electronics and gadgets imported from China are not so cheap anymore.
If Trump losses the election in 2020, and the Democratic-Socialist take over, personal income tax rates will go up. Although they will suggest that any tax increase will only affect the rich, don’t believe that lie.
The rich have the money and ability to lobby politicians. And many are all too eager to accept their donations.
Even Rep. Alexandria Ocasio-Cortez admits this. Just hear her explain how easy it is in this video.
If lobbying does not work, the rich will simply do as Amazon recently did and leave – taking their money and jobs with them.
Deficits really do matter.