Question

Give 4 implications of how an increase in interest payments on foreign debt by a government would affect an economy.

Answer 1

Talkng about our American economy, here are following points

Reduced Public Investment. As the federal debt mounts, the government will spend more of its budget on interest costs, increasingly crowding out public investments. Over the next 10 years, the Congressional Budget Office (CBO) estimates that interest costs will total $5.9 trillion under current law. Currently, the U.S. spends more than $1 billion per day on interest payments.

Reduced Private Investment. Federal borrowing competes for funds in the nation’s capital markets, thereby raising interest rates and crowding out new investment in business equipment and structures. Entrepreneurs face a higher cost of capital, potentially stifling innovation and slowing the advancement of new breakthroughs that could improve our lives. At some point, investors might begin to doubt the government’s ability to repay debt and could demand even higher interest rates — further raising the cost of borrowing for businesses and households. Over time, lower confidence and reduced investment.

Diminished Fiscal Flexibility. High levels of debt not only makes a fiscal crisis more likely, it also reduces our government’s flexibility to respond to future emergencies, unanticipated challenges, wars, or recessions. Indeed, one reason why the United States was able to recover from the Great Recession more quickly than other countries was because our debt was fairly low — at 35 percent of GDP — before the financial crisis began. As a result, U.S. policymakers had considerable flexibility in addressing the crisis. If debt had been significantly higher at the start of the crisis — as it is now — it would likely have been more difficult to respond. Similarly, the United States had the fiscal wherewithal to meet the considerable demands of fighting World War II because debt was relatively low before the war.

Challenges to National Security. Our fiscal security is also closely linked to our national security and ability to maintain a leading role in the world. As Admiral Mullen, former Chairman of the Joint Chiefs of Staff, put it: “The most significant threat to our national security is our debt.” As the national debt grows, not only are we more beholden to creditors around the globe, but we have fewer resources to invest in strength at home.

Imperiling the Safety Net. America’s high debt jeopardizes the safety net and the most vulnerable in our society. If our government does not have the resources and stability of a sustainable budget, those essential programs, and the individuals who need them most, are put in jeopardy