This Tuesday, the U.S. national debt tipped over $37 trillion. How does this impact the average American? Let’s dive in.
First, the national debt is simply the amount of money the federal government has borrowed to cover its outstanding balances. It works similar to an individual using a credit card and not paying off the full balance each month, creating a deficit. These deficits accumulate and make up the national debt.
Debt has been with the U.S. since the Revolutionary War, when it borrowed from domestic investors and the government of France. In recent years the debt has grown in large spikes, due in part to the Afghanistan and Iraq Wars, the 2008 Great Recession and the COVID-19 pandemic.
Robert Pozen from the Massachusetts Institute of Technology joined WWL’s Tommy Tucker earlier this summer to discuss the debt. He told Tucker that economists generally advise that spending not exceed 100% of gross domestic product (GDP), or the total amount of goods and services a country produces.
After former President Bill Clinton’s tenure in the 1990s, spending was at 33% of GDP. Today, it is at around 120%, said Pozen.
At more than $37 trillion, the national debt represents $108,424 of debt per person in the U.S., according to the Peter G. Peterson Foundation. That’s only expected to get higher – for example, the recent “One Big Beautiful Bill” spending legislation is expected to add at least another $3 trillion to the debt.
Why should this matter to everyday Americans? What does the nation’s debt have to do with personal finances? As it turns out, a lot. To help us understand how, Pozen focused on interest rates.
U.S. debt is purchased by various entities, including foreign governments (like we mentioned with France during the Revolutionary War). Currently, Japan and China own much of the U.S. debt, Pozen said.
“That makes our debt particularly perilous, because if these countries stop buying new debt, then interest rates would go even higher,” he added.
As the U.S. tries to sell more debt, it has to offer higher even interest rates. That basically means the amount the U.S. pays for its creditors, such as Japan and China, to take on this debt.
“That’s especially true if you try to entice foreigners, because right now the U.S. is in quite an adversarial position with China,” Pozen explained, referring to the ongoing tariff wars between the U.S., China and other countries. “So, it’s unclear whether China will continue by buying a lot of debt and even countries like Japan, U.K., and Europe.”
Once the interest rates go up, it creates a bit of an interest rate spiral. Per the Peter G. Peterson Foundation, the U.S. spends $2.6 billion on interest payments every day.
“The dynamic looks like this. Interest rates go up. That then increases the federal deficit. Right now, interest rate costs are bigger than defense spending and if rates go up and the deficit go up, it will be even bigger,” Pozen said. “And as the deficit goes up then rates… there’s more pressure on rates, so that’s the vicious circle that you could be in.”
Here’s where things impact American households. Interest rates impact everyone who needs to spend, sell or borrow.
With higher rates, businesses would have a much harder time financing themselves and are vulnerable to bankruptcy, said Pozen. Individuals and families have to pay more to service their mortgages and it becomes harder to get new mortgages, so the housing market can become depressed. High credit card interest rates can even lead to personal bankruptcy.
“These are some of the things that could happen as interest rates go up and stay up,” Pozen said. He told Tucker in June that the U.S. was already on the border of this vicious interest rate spiral, especially due to expected spending included in the “One Big Beautiful Bill” legislation. National debt can also impact bond markets and the stock market, as explained here by U.S. Bank.
Defaulting on the debt isn’t really an option, said Pozen. If the U.S. did, it wouldn’t be able to issue any more debt. Still, he expects that those interest payments will continue to grow.
Pozen said that benefit payments such as Social Security, Medicare, Medicaid are some of the biggest drivers of debt, but that it would be nearly impossible politically to change those programs in a way that would lower benefits. Last year, the Congressional Budget Office issued a report detailing multiple options for reducing the national debt, including changes to spending and taxation.