The national debt has breached the $20 trillion threshold, but what does this mean?
It means that the Federal Government is spending more than it’s earning and is thus depending on external sources for compensation. This includes extra-governmental resources such as independent investors, companies, or foreign governments. The Federal Government issues them a treasury security, a type of bond, that serves as a promissory note for repayment with interest. Essentially the bond is an IOU.
The more bonds are issued, the more the Federal Government owes. The more it owes, the more interest accrues, and thus even more debt.
What is the government paying for and how can this spending be regulated?
There are two categories where the Federal Government spends money, mandatory spending and discretionary spending.
Mandatory spending is legislated requirements for federal spending. In 2016, mandatory spending made up nearly 60% of the entire federal budget. Primary programs within this category include Social Security and Medicare. These two programs amount to more than 40% of the mandatory spending in the national budget.
Discretionary (not mandatory) spending covers programs that are crucial to American prosperity: the Department of Defense, for example, falls within the discretionary category. While it wouldn’t make any sense to stop funding for the DOD, discretionary means the executive branch has more leverage of shifting the budget amount.
So when budgets are set to spend more than what is earned, debt increases.
How can it be paid off?
Methods of paying the debt off are debatable.
If taxes are increased, citizens have less money to invest in the economy.
If spending is reduced, the beneficiaries of this spending (many American citizens) will be at a loss.
If taxes are reduced, citizens will have more to pour into the economy but less will be given to spending.
If taxes and spending are left alone and instead more money is printed to pay off debt, inflation is inevitable.
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