According to Robert C. Pozen, senior lecturer at Harvard Business School, a likely $14.3 trillion gross public debt in the U.S. (by the end of 2010) will have serious future effects on the country. Such a high number is likely to cause a higher interest rate, slower economic growth and serious problems to federal entitlement programs such as SSI.
Gross Public Debt
Gross public debt is the total dollar amount of public and private financial liability in a country. It excludes internal debt between public sector units. For example, if a city-owned bus company owes the municipality monies for renting public facilities, this amount is not taken into account within gross public debt.
Does Not Include
Gross public debt does include public debts such as city, state and government money owed to private companies and private debt such as mortgages, personal loans and credit card debt.
Percent of GDP
Some financial experts say that gross public debt should not exceed 60 percent of a country's gross domestic product (market value of all goods and services made within a country per year). In the U.S., gross public debt has ranged from 30 percent to 90 percent of GDP with relatively little effect on inflation or general economic growth.
In a February 2010 article in the Boston Globe, Pozen writes that if the gross public debt begins to stay around 90 percent, foreign investors may become concerned about the country's ability to keep spending under control, and will begin to demand higher interest rates to buy the increasing volume of U.S. Treasury bonds. To cite a micro-example, if a person begins to incur a great deal of debt, a bank will ask for a higher down payment on a loan, or give the client higher interest rates. It is the same on the macro-level with countries.
Gross Public Debt Effects
Higher interest rates will affect those with credit card debt, homeowners with adjustable rate mortgages and in general private and public entities with borrowing needs. Since more monies are needed to finance debt, the country's general economic growth begins to slow as the gross public debt climbs. As the government tries to react to both the increased debt and slower economic growth, programs such as social security and Medicaid are likely to be cut as well as any type of spending that is not essential to the country's functioning.
The Economic Cycle
The economy generally moves in cycles. As the gross public debt increases, the government and free market react to limit it and keep the country running. As the strategies take effect, the gross public debt decreases. Times of plenty then lead to increased spending and the debt begins to rise again.