U.S. Government Debt Is At Record Highs And Will Likely Go Higher

What Are The Implications Of This?

Federal debt is at record highs thanks to all the fiscal stimulus that’s being used to keep households and businesses afloat in these trying times:

Right now, it’s easy to look past all this debt accumulation. We honestly have no choice. Our country’s bungling of this crisis has put a ton of people’s lives and livelihoods in jeopardy.

But when it’s over (whenever that is), it will be time to pick up the economic pieces. Before then, it would be prudent to spend some time thinking about what the impacts of this unprecedented debt binge will be on the country, its economy, and its citizens.

Public debt (government borrowing) is different from regular debt (individual or business borrowing). When individuals or businesses issue too much debt relative to their incomes, it’s pretty obvious what will happen — eventually they go bankrupt (usually due to a negative shock to income).

For governments the outcome is much less obvious. Most of the larger developed world economies like the U.S. borrow primarily in their own currencies. Contrast that with many emerging economies that borrow primarily in U.S. dollars — these countries are much more like businesses in terms of their ability to handle debt. When economic hardship makes it difficult for these countries to service their debts, their currencies crash (relative to the currency they borrowed in) and they are forced to declare bankruptcy.

Countries that borrow in their own currency have much more flexibility because at the end of the day, if necessary, they can service their debt with printed money. Of course threatening to literally print your way out of debt will severely weaken your currency and is a recipe for hyperinflation, but gradual debt monetization (usually via inflation) is one lever that countries can use to gradually lower their debt-to-GDP levels.

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