Every time a Republican politician chirps that that cuts to the US defense budget are unacceptable, or a Democratic office holder squawks that funding for social programs should be increased, one wonders if either side really understands the harm that government indebtedness could do to our country.
If domestic and foreign lenders lose confidence in the federal government’s ability to repay its debts, interest rates on federal debt will drift upward. Then, interest rates in the rest of the domestic market will also begin to rise (banks will be forced to compete with the rates the government is offering). While this trend will be nice for savers, borrowers will be in a tight spot.
The interest rate charged for business loans, mortgage loans, car loans, and sundry other loans, will increase. This in turn will reduce the public’s access to the easy money that often fuels large purchases.
Obviously, businesses that specialize in these sales (e.g. real estate, car dealers) will be harmed. Unfortunately the ripple effects of higher interest rates will gradually impede the economy – job growth will slow, small businesses will suffer, and our overall standard of living will decline.
So the next time you hear one of your elected leaders complaining about the prospect of spending cuts, begin looking for a new office-holder. Evidently, the politician who currently warms the seat has yet to complete the first step.