The Danger of Increasing Government Debt and a Potential Solution
The US government continues to deficit spend, now reaching an all-time high of $27.3 trillion [1]. Although deficit spending may seem like the better alternative to increasing taxes, it comes with a steep price.
The US government, similar to all other governments, uses treasury bonds to support spending; an increase in debt grows the number of treasury bonds the government offers. Those treasury bonds can be bought by both domestic and international investors and by governments of other countries. A treasury bond promises US government money to the owner of the bond. Treasury bonds, however, have an interest rate, eating up almost 10% of the US annual federal budget.
Unfortunately, spending on interest isn’t the worst part of deficit spending. Domestic investors love investing in treasury bonds because they are much more secure than company stocks; company stocks include the risk of no investment return, while government bonds almost guarantee a return. Hence, whenever government debt bloats, investors rush to buy those bonds leaving little space in their budgets to invest in company stocks. Because stocks play a critical role in helping companies startup and grow, many are left vulnerable or even unable to start because of this surge of treasury bonds. This effect has a direct impact on US GDP by limiting business growth.
Because the US gradually increases its debt rather than spending it all at once, government debt spending never takes a huge toll on the economy. Only a few investors at a time buy the bonds, leaving time for companies to accordingly accommodate. However, if the government were to implement a policy causing them to spend trillions at once, which is more likely to occur after the COVID-19 recession, we’d see less investors willing to invest in companies, thus decreasing economic growth.
A possible solution to this problem would be simply reducing the domestic demand for treasury bonds. The government sells these treasury bonds to US investors at a public auction. In that auction, if the government decreases the cap on the interest rate, the interest rate for the bonds will decrease. Because many investors are risk takers and would want to choose the investment with the higher profit, domestic demand for treasury bonds will decrease, and many investors will stick with company stocks. However, the government would need to compensate for this loss in demand by increasing international demand for US treasury bonds; the government would need to increase interest rates of treasury bonds sold internationally, making more countries incentivized to buy the bonds, and compensating for the loss from decreased domestic demand.
Although this impact of government debt spending would only take place with a huge government expense all at once, the US government should keep an eye out for the decrease in stock investment and take preventative actions in case the effect does occur.
1: US Government “US National Debt Clock: Real Time”
https://www.usdebtclock.org/
