How Rising National Debt Drives Up Interest Rates — and What That Means for Americans
America’s unsustainable and rising national debt is putting upward pressure on interest rates, and that has significant negative consequences for the budget and across the entire economy. A new report from Third Way examines the relationship between federal debt and interest rates, identifying and explaining the implications for American families and businesses.
Below are four key takeaways from the paper:
- Rising debt drives up interest rates through the bond market. As the federal government runs a deficit, it must borrow the difference by issuing Treasury securities. Increased supply of U.S. Treasuries pushes yields higher to attract investors. Those yields then serve as a benchmark for interest rates across the economy.
- Rising debt increases borrowing costs not only for the government, but also for Americans. Higher interest rates driven by rising indebtedness are impacting household budgets and making life less affordable. Rising borrowing costs mean larger payments on mortgages, car loans, student loans, business loans, and credit card debt.
- Rising debt can crowd out resources available for private investment. As interest costs climb, borrowing costs grow for private investment in capital assets such as machinery, buildings, and technology, which can reduce investment. Additionally, because government bonds are considered safe assets, they can compare favorably to riskier private-sector assets. This crowding out reduces productive capital in the economy.
- Diminished private investment harms the economy. When federal borrowing crowds out private investment, businesses have less capital, which can slow innovation, productivity, and ultimately economic growth. For workers, this effect can raise unemployment and slow wage growth over time.
By adding upward pressure to interest rates, the rising national debt can increase the cost of living for American households, crowd out private investment that supports businesses, and cause long-term economic damage. Third Way’s report emphasizes the need for lawmakers to choose a better path forward.
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Further Reading
The Fed Held Its Target Range For the Fifth Meeting in a Row but Interest Costs Remain High
High interest rates on U.S. Treasury securities increase the federal government’s borrowing costs.
The Rising National Debt Means Fewer Jobs, Lower Wages for Young People
The national debt is growing faster than ever, and the consequences for the job market are serious.
The National Debt Can Crowd Out Investments in the Economy — Here’s How
Large amounts of federal debt could “crowd out” investments by the private sector, making the economy less productive and stunting wage growth.