Do federal deficits and the debt really matter? Yes, and you're actually already paying for it
Bottom Line: In light of the recent two-year budget deal that's increasing spending by about 20%, many conservatives (and even many Democrats looking to score political points) have expressed concern about our ever-growing national debt. This is the on again off again debate that never really seems to go anywhere while our debt continues to go up. So, does it really matter? In an intellectual sense you know the answer is yes. There comes a point when only so much debt can be accrued without bigger problems...but in the practical realm we've had the same debt debate seemingly forever but nothing really seemed to impact us. Or has it and is it?
The first number that matters is the debt to GDP ratio. Historically, whether in the US or around the world this is the first number to check to see how much longer-term debt risk a country has. Simply put, countries that have larger economic output in a year than debt owed are generally considered stable (The World Bank recommends that countries not exceed 70% however). Well, we crossed that threshold several years ago and haven't looked back. 2011 was the last year that our economy outsized our debt. So, the US does have longer term debt risk. Still why does this matter and why should we care?
With ever rising debt we don't have enough money to meet our obligations, so we have to borrow just to pay our bills. That works until it doesn't. Now anyone who's had personal debt problems can easily answer that question. It works until you can't even afford to pay the minimum monthly obligations that are due. Last year a record $276 billion was spent servicing our debt. That was 6.8% of all federal spending. What does that mean? It means that at a minimum if we stopped having people buy new debt of ours about 7% of everything done by the federal government would have to stop. What's more is that the budget that just passed increases spending by around 20% over the next two years. What does that mean? It means that by 2020 an estimated 10% of all federal spending will simply go to servicing the debt we already have. You can see how this story is going. You might not see, touch, or feel it yet but it's real and eventually it has to be accounted for. There really isn't a free lunch. What's more is that you're actually already paying more personally because of it. How? Interest rates.
You've noticed interest rates are rising. Yes, an improving economy is part of it but it's not the only factor. As the US's debt burden becomes bigger and riskier the level of interest demanded by those buying our debt is also higher (just as is the case for people who have a riskier credit history). That's causing the overall interest rate picture to inflate faster than it would otherwise. So, from your credit card to your next loan - you're already impacted. Over the longer run fiscal restraint will have to happen one way or another. Hopefully it won't come via insolvency - which is unlikely...however it could come via Medicare and Social Security - which is very likely.