Before going into exactly what impact that government debt can have on you as an individual, we first need to look at two other things: the impact on the government and the impact on the economy. Much of the impact in these two categories may have little to no impact on specific individuals, but examining the whole situation will give us all a better idea of what is happening.
The easier of the two impacts to examine is the impact on the government. It's actually quite straight forward.
As discussed earlier, there is no immediate drawback to the government being financed by debt rather than by taxes. The two are simply different methods of obtaining funding. The drawback is eventual financial instability.
When talking about corporations, the decision as to whether or not debt is a good way to finance business operations usually comes down to the sorts of cash flows you can expect in the future.
For instance, an ice cream shop has seasonal revenue. It only makes money during part of the year, and shuts down operations during the rest of the year. Debt is generally a poor way to finance business activities when your cash flows are periodic or uncertain, as the possibility of not being able to pay interest at some point is very important in your decision making process.
On the other hand, if you have steady revenue and are confident that this will continue to be the case, debt is a great method of financing activities, as the financial instability created by having the debt is greatly lessened when you know, without a doubt, that you can pay the interest and, eventually, repay the entire loan. Obviously guaranteed revenue is something that can never truly be obtained, so this is a best-case scenario. Right?
Not exactly. The government has the best possible example of constant, assured revenue that I can think of. Ever year, individuals WILL pay taxes, because the government has the ability to punish them if they do not. To draw an analogy, imagine if McDonald's could imprison you if you purchased a meal from, say, Burger King. You'd be much more likely to go to McDonald's, right?
The only risk associated with taking on debt for the government is the cyclical nature of the economy. During a recession, less taxes are paid, decreasing the overall revenue of the government significantly, greatly increasing the likelihood that they will be hard-pressed to meet requisite interest payments.
What this essentially means is that the United States federal government is incredibly secure when it comes to using debt as a method of financing their activities. The economy in the United States is generally quite strong, and even during recessions the possibility of failing to take in enough taxes to meet interest is remote. More importantly, even if such were the case, the government has the authority to simply print more money to meet obligations.
As such, direct negative impacts on the government as a result of being financed by debt are, essentially, zero. For them, the most they have to really worry about is the inconvenience of having to allocate money to pay off interest every year.
What I'm saying, then, is that the government has no incentive to not finance activities through the use of debt. We can then say that if the government having substantial debt causes negative impacts elsewhere we have a problem, as the government has no incentive to stop using debt as a method of finance until we give them one.
And that's all said and done. I'm sure things are a bit broad at the moment, but we'll be getting down to what debt means to the individual in the next few posts.
Also, for those who care, it looks like my regular update schedule will be Tuesday/Thursday and, if I can manage it, something on the weekend.
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