Turn on the TV, and you may well see an array of knowledgeable talking heads pontificating gravely on matters macroeconomic.
Righteous indignation against the size of the national debt is certain to form a part of their analysis.
"OK", you think, "I get how this is important as part of the big picture.
But why does it matter to me?" To answer this, it's important to know what the national debt actually is.
Simply put, it's the total amount of money that the national (not local) government has borrowed.
In contrast, the deficit is the amount of money a government borrows in one year - this gets added to the national debt.
The national debt is not the total amount of money owed by consumers - that is, ordinary people like you and me.
It's only money owed by the government.
This money can be owed to anyone: individuals, banks, pension funds, etc.
So how does big spending by the government affect you? It may seem like it's on a different level to everyday life, but remember - that debt has to be paid by you.
So the first effect of the national debt on you as a consumer is that eventually either your taxes will go up to pay the interest on it, or the government will cut its spending whilst keeping taxes the same, meaning you have to pay for things the government gave you for free before.
Either way, you lose some of your income because of the national debt.
The other effects of the national debt involve the price of money.
This is just the cost of getting money now, i.
e.
the cost of borrowing.
The thing is, different people and businesses have different credit ratings.
If you're earning $200,000 a year, then most banks will be happy to lend you money - say $5,000 - at a low interest rate because they expect you to be able to pay it back.
But if you're earning $20,000 per year, then a bank will be less sure that you're going to be able to pay that $5,000 back, and so they'll charge you a higher rate of interest to compensate for that increased risk.
And the same applies to governments.
The difference is that governments are considered to be the safest borrowers in an economy.
As the national debt increases, lenders become less sure that it will be able to pay them back, so they increase their rates to cover this possibility.
This in turn increases the cost of everyone else's borrowing, because the government is still considered to be the safest borrower in the economy, and so the rate of interest for the government serves as a baseline for rates of interest for all other borrowers.
So as the national debt increases, it becomes more expensive for everyone to borrow - including you.
This means that if you borrow money, it'll cost you more and so you'll be able to buy less - all because of the national debt.
Now, you may not commonly borrow money.
But even so, higher interest rates will impact you.
Getting a mortgage, something most homeowners have at some stage, will become more expensive.
That's a big extra expense for you.
And that it turn reduces the number of people who can afford to buy houses, meaning house prices should fall because of the laws of supply and demand.
If demand for houses falls because the cost of buying has gone up, then house prices will adjust downwards to compensate for that.
So if you own a house, the national debt will eventually decrease its value.
And even if you don't plan on selling your house, you'll be subject to the wealth effect - an economic phenomenon where you spend more when you feel richer.
Because your house will be worth less, you'll feel poorer and spend less on other things like holidays as a result.
That's how the national debt directly affects you.
But personal interest rates are just the beginning.
To realise the wider effects of the national debt, you have to look at the broader economy.
It may seem unconnected, but I'll show you how it all relates to the money in your pocket.
We've established that a larger national debt leads to higher borrowing costs for everyone in the economy.
Well, this includes businesses - whether they borrow from banks or raise the money themselves from other investors.
Obviously, the more they have to pay back the greater their costs.
This can lead to several outcomes.
Firstly, businesses may put up their prices - the technical term for this is cost-push inflation, which just means that prices are rising because an underlying price - in this case the price of borrowing - has risen first.
Higher prices for businesses' products mean you can't afford to buy as much.
Secondly, businesses may be unwilling or unable to invest in new equipment or machines because borrowing the money to get them is too expensive.
This could have two effects: new machines may make production cheaper in the long-run, so in two years time computers may be the same price instead of being 10% less; or the quality of the goods may not improve because new machines couldn't be bought, meaning your computer is built less well than it would have been if the business had invested in better machinery.
Thirdly, businesses are likely to see their profits fall anyway, even if they raise prices, because their costs have still risen.
If you own any shares - either directly or through a pension plan - this means that their value may fall, or at least not grow as rapidly as they would have done.
This also makes you poorer.
Finally, if the cost of borrowing gets too high - especially for start-up businesses - then they may be unable to continue in business at all.
In this case the government is likely to move in, providing the goods or services required.
But whilst this is sometimes great - for example free education - the government commonly uses resources less efficiently than private businesses, because it isn't disciplined by the need to make a profit.
This can lead to waste and inefficient procedures, such as a complex bureaucracy that does nothing to help you as a consumer.
When you remember that, as a taxpayer, you are actually paying for these government services, you can see that having private businesses involved might actually be a better solution.
So to summarise, the national debt can encourage 'big government', which can lead to inefficiency.
Taxes, house prices, rates of interest.
They might sound boring, but hopefully you can now see how the national debt affects all of these, and in turn they have a real effect on you and what you can buy.
You'll notice these effects aren't often discussed on the TV (and when they are they're often hidden by jargon like 'cost-push inflation' or the 'crowding-out effect').
Instead, there is talk about defaults and the IMF and rising bond yields.
These are complex, but can effectively be summarised in two outcomes.
If the national debt gets too big, then international agencies like the International Monetary Fund (IMF) will be called in.
They will tell the government what to do, and it has to obey.
And what it is told to do will often be to cut its spending, savagely.
This means that things previously provided for you by the government will have to be paid for by you.
If the government doesn't agree, or the problem is too severe, then it will default on its debt and refuse to pay.
This is disastrous, because it wipes out much of the value of that debt, much of which is held by pension firms in the country.
Essentially, when the government goes bankrupt, the pension firms go bankrupt.
And that means your pension is gone.
So the big effects discussed on TV are important, and definitely will have an impact on you.
Nevertheless, don't forget that the national debt has many smaller but no less real effects on you as well, even if it's small and not going to cause an international crisis.
Righteous indignation against the size of the national debt is certain to form a part of their analysis.
"OK", you think, "I get how this is important as part of the big picture.
But why does it matter to me?" To answer this, it's important to know what the national debt actually is.
Simply put, it's the total amount of money that the national (not local) government has borrowed.
In contrast, the deficit is the amount of money a government borrows in one year - this gets added to the national debt.
The national debt is not the total amount of money owed by consumers - that is, ordinary people like you and me.
It's only money owed by the government.
This money can be owed to anyone: individuals, banks, pension funds, etc.
So how does big spending by the government affect you? It may seem like it's on a different level to everyday life, but remember - that debt has to be paid by you.
So the first effect of the national debt on you as a consumer is that eventually either your taxes will go up to pay the interest on it, or the government will cut its spending whilst keeping taxes the same, meaning you have to pay for things the government gave you for free before.
Either way, you lose some of your income because of the national debt.
The other effects of the national debt involve the price of money.
This is just the cost of getting money now, i.
e.
the cost of borrowing.
The thing is, different people and businesses have different credit ratings.
If you're earning $200,000 a year, then most banks will be happy to lend you money - say $5,000 - at a low interest rate because they expect you to be able to pay it back.
But if you're earning $20,000 per year, then a bank will be less sure that you're going to be able to pay that $5,000 back, and so they'll charge you a higher rate of interest to compensate for that increased risk.
And the same applies to governments.
The difference is that governments are considered to be the safest borrowers in an economy.
As the national debt increases, lenders become less sure that it will be able to pay them back, so they increase their rates to cover this possibility.
This in turn increases the cost of everyone else's borrowing, because the government is still considered to be the safest borrower in the economy, and so the rate of interest for the government serves as a baseline for rates of interest for all other borrowers.
So as the national debt increases, it becomes more expensive for everyone to borrow - including you.
This means that if you borrow money, it'll cost you more and so you'll be able to buy less - all because of the national debt.
Now, you may not commonly borrow money.
But even so, higher interest rates will impact you.
Getting a mortgage, something most homeowners have at some stage, will become more expensive.
That's a big extra expense for you.
And that it turn reduces the number of people who can afford to buy houses, meaning house prices should fall because of the laws of supply and demand.
If demand for houses falls because the cost of buying has gone up, then house prices will adjust downwards to compensate for that.
So if you own a house, the national debt will eventually decrease its value.
And even if you don't plan on selling your house, you'll be subject to the wealth effect - an economic phenomenon where you spend more when you feel richer.
Because your house will be worth less, you'll feel poorer and spend less on other things like holidays as a result.
That's how the national debt directly affects you.
But personal interest rates are just the beginning.
To realise the wider effects of the national debt, you have to look at the broader economy.
It may seem unconnected, but I'll show you how it all relates to the money in your pocket.
We've established that a larger national debt leads to higher borrowing costs for everyone in the economy.
Well, this includes businesses - whether they borrow from banks or raise the money themselves from other investors.
Obviously, the more they have to pay back the greater their costs.
This can lead to several outcomes.
Firstly, businesses may put up their prices - the technical term for this is cost-push inflation, which just means that prices are rising because an underlying price - in this case the price of borrowing - has risen first.
Higher prices for businesses' products mean you can't afford to buy as much.
Secondly, businesses may be unwilling or unable to invest in new equipment or machines because borrowing the money to get them is too expensive.
This could have two effects: new machines may make production cheaper in the long-run, so in two years time computers may be the same price instead of being 10% less; or the quality of the goods may not improve because new machines couldn't be bought, meaning your computer is built less well than it would have been if the business had invested in better machinery.
Thirdly, businesses are likely to see their profits fall anyway, even if they raise prices, because their costs have still risen.
If you own any shares - either directly or through a pension plan - this means that their value may fall, or at least not grow as rapidly as they would have done.
This also makes you poorer.
Finally, if the cost of borrowing gets too high - especially for start-up businesses - then they may be unable to continue in business at all.
In this case the government is likely to move in, providing the goods or services required.
But whilst this is sometimes great - for example free education - the government commonly uses resources less efficiently than private businesses, because it isn't disciplined by the need to make a profit.
This can lead to waste and inefficient procedures, such as a complex bureaucracy that does nothing to help you as a consumer.
When you remember that, as a taxpayer, you are actually paying for these government services, you can see that having private businesses involved might actually be a better solution.
So to summarise, the national debt can encourage 'big government', which can lead to inefficiency.
Taxes, house prices, rates of interest.
They might sound boring, but hopefully you can now see how the national debt affects all of these, and in turn they have a real effect on you and what you can buy.
You'll notice these effects aren't often discussed on the TV (and when they are they're often hidden by jargon like 'cost-push inflation' or the 'crowding-out effect').
Instead, there is talk about defaults and the IMF and rising bond yields.
These are complex, but can effectively be summarised in two outcomes.
If the national debt gets too big, then international agencies like the International Monetary Fund (IMF) will be called in.
They will tell the government what to do, and it has to obey.
And what it is told to do will often be to cut its spending, savagely.
This means that things previously provided for you by the government will have to be paid for by you.
If the government doesn't agree, or the problem is too severe, then it will default on its debt and refuse to pay.
This is disastrous, because it wipes out much of the value of that debt, much of which is held by pension firms in the country.
Essentially, when the government goes bankrupt, the pension firms go bankrupt.
And that means your pension is gone.
So the big effects discussed on TV are important, and definitely will have an impact on you.
Nevertheless, don't forget that the national debt has many smaller but no less real effects on you as well, even if it's small and not going to cause an international crisis.
Source...