As published in NY Times: In remarks to the House Budget Committee, Mr. Bernanke said that the government must address the immediate problems of a crippling recession that has erased trillions of dollars in household wealth, hobbled investment portfolios and raised unemployment to its highest levels in a generation. Still, he said, the government needs to think about putting its fiscal house back in order.
Failing to do so may erode investor confidence and endanger the economy's prospects for long-term health added Mr. Bernanke. Prior to the Federal Reserve chairman's testimony, President Obama has vowed to reduce the deficit by half at the end of 2012. As of May 2009, the US budget deficit reached $984 billion and the White House estimates that the budget deficit this year will reach $1.8 trillion.
An accumulated deficit over several years is the government debt. Each year since 1969, Congress has spent more money than its income. Thus, according to the US National Debt Clock, the national debt has already reached $11,401,938,192,464.77. That's $37,221.31 for every man, woman and child in the U.S.
Should the public be worried about huge national debt? Here are some Reasons to Be Concerned About Current Government Borrowing Levels.
* Present Government borrowing is not to finance investment in the economy. A large percentage of the debt is to finance transfer payments to an ageing population. If the government was borrowing to invest in infrastructure - new roads, communications. It might help to increase the growth rate in the long term. This in turn, would lead to higher tax revenues. However, paying pensions and health care to an ageing population, will do nothing to facilitate economic growth and higher tax revenues. It will get more and more difficult to finance the national debt.
* Inflationary Pressure. If debt becomes too high, there may be insufficient investors to buy the government securities (the way of financing the debt). Therefore, the government may be tempted (or forced) to fill the shortfall in revenue by printing money. Printing money and increasing the money supply, will lead to inflation. The problem with inflation is that it devalues the value of bonds, people will sell bonds, leading to higher interest rates on bonds and higher debt interest payments. If investors see inflation is getting out of control, people will not want to hold bonds. Foreign investors will sell their securities and this will cause devaluation in the currency. This is particularly a problem for the US, where foreign countries hold a high % of the national debt.
* Crowding Out. It is argued that if government borrowing increases, it will cause crowding out of the private sector. If the private sector buy bonds, it means the private sector has less funds for private sector investment. Also, if borrowing increases, interest rates may rise. Higher interest rates also reduce private sector spending and investment.
