Question

The debt problem is now more imminent because the Federal Reserve has sharply increased borrowing costs to curb inflation, causing the government to pay a surge in interest. While the country will still be able to easily finance its more than $26 trillion public debt, rising spending on government entitlements and interest is likely to snowball in the coming decades, forcing Washington to take early action to rein in the annual deficit.

As a new wave of securities has hit the market in recent years amid dwindling revenues, higher interest rates and surging expenses, executives at Wall Street firms that finance the bonds have become increasingly public about their concerns about the country's ability to get its long-term finances under control.

Answer 1

Governments struggle with rising debt and interest rates, leading to difficult fiscal measures like budget cuts and tax increases. An increasing debt-to-GDP ratio raises market uncertainty and might induce inflationary measures that can harm the economy. Congress debates the appropriate Debt Ceiling, reflecting confidence in the government's debt management.

The Impact of Rising Government Debt

Governments face increasing challenges as they deal with rising national debt and budget deficits. Higher interest rates on debt increase the cost of financing, pressuring governments to implement unwelcome measures like spending cuts and tax increases. These actions are necessary to reduce budget deficits but can have a contractionary effect on the economy by reducing aggregate demand.

An aging population demands more government services, increasing budget deficits and pulling resources away from investments in human and physical capital. Additionally, an increasing debt-to-GDP ratio creates uncertainty in financial markets and may force a government to use inflation to lessen the real value of its debt, thereby harming the economy further. If a government has locked in debt at a fixed interest rate and inflation rises above this rate, the real interest rate can become negative, allowing the government to effectively repay less than the original value of the debt.

Congress controls the Debt Ceiling, a cap on how much the government is permitted to borrow, which is often a matter of intense political debate. The confidence in a government's ability to pay back its debt affects interest rates and the willingness of investors to purchase government bonds.