What would be the result of a drastic rise in the national debt, say
into the quadrillions or quintillions of dollars?  I always hear
people moaning about the national debt but I don't understand why it's
bad, since the government is essentially the ultimate credit
reservoir.  Does a rise in national debt simply devalue the nation's
currency?  What is the mechanism and effects?  Somehow I don't think
the government would be prevented from affording goods/services, since
they always get to draw on an unlimited credit line.

Hello mjsmigel-ga,

A recent article by the Concord Coalition -- a bipartisan organization
that is devoted in significant part to reducing the national debt --
explains the problem as follows:

"The problem with deficits is that they soak up national savings and
crowd out productive investment.  They do so by raising interest
rates.  CED [The Committee for Economic Development] estimates that,
over the course of the business cycle, each one percent increase in
the federal deficit as a share of GDP pushes up interest rates by
one-half percent."

"The Truth about Entitlements and the Budget" (A Fax Alert from The
Concord Coalition - Volume IX, Number 1 - March 10, 2003) [under
heading "History's Bottom Line"]
The Concord Coalition
http://www.concordcoalition.org/facing_facts/alert_v9_n1.html

A publication from the Federal Reserve Bank of New York elaborates on
this problem:

"Large amounts of government borrowing can 'crowd out' private
investment as budget deficits exert upward pressure on interest rates.
 If the government borrows large amounts of money, there is less for
everyone else, and interest rates tend to rise.  Some private
borrowers might not be able to afford the higher rates. ... [T]o the
extent that deficits lead to less business investment, there will be
slower growth in the future."

"Understanding the Federal Debt and Deficit" (Federal Reserve Bank of
New York, Public Information Department, 1994) [page 13 of PDF file]
"Debt and Deficits", by David Rosen
Economic Education Website
http://ecedweb.unomaha.edu/ve/library/DEBT.PDF

Both of these publications note that foreigners own a significant
portion of the debt, thus taking up some of the slack.  But both also
note that the government must pay interest to those foreign debt
holders -- money which might otherwise be invested in our economy.

As these publications indicate, some economists disagree that the
growing national debt is a problem (though they might be more
concerned with a debt in the quadrillions).  But I have tried here to
show the arguments for lowering the national debt.

You can find more information in the CED report cited by the Concord
Coalition:

"Exploding Deficits, Declining Growth: The Federal Budget and the
Aging of America" [see especially Chapter 1]
(March 2003)
CED
http://www.ced.org/docs/report/report_deficit.pdf

Please let me know if anything is unclear in these explanations --
this can be a confusing topic.

- justaskscott-ga


Search terms used on Google:

"national debt"
deficit debt savings investment rates
"committee for economic development"

[I tried other searches as well, but these searches resulted in the
pages I have cited.]

Very interesting... thank you!

Debt is bad period.  The United States holds currency reserve status
through the greenback.  If the U.S. $ continues to depreciate, the
Americans banks will default on all the debt they have accumulated
over the years.  The Americans have a trade deficit, meaning they
Import more than the Export; makes sense since everyone is looking for
the American dollar as their substitute for gold (fiat currencies). 
Japan like other countries, hold American T-bills; in rough amounts,
about 10% of the U.S. debt.  With the Euro on the upswing, and OPEC
oil beginning trade through a Euro cash flow medium, it makes sense a
lot of countries will dump their US reserves, and begin holding other
currencies (this also helps hedge against the devaluation).  Imagine
all the banks being required to pay back for those government T-bills
and other debt loads.  It would not be possible.  A printing press
would also not do the trick, since it would send the U.S. dollar into
a even bigger decline, and inflation would be unbearable.  Another
depression? It may be so.  Just look at what happened in 1931 in the
UK.

Another reason it is bad to have a large debt is the same reason that
it is bad for you or me to have one.  The interest payment kills!  At
the present historic low interest rates, caused by the global
recession and the subsequent lowering of demand for capital, this
accounts for something like 25% of every tax dollar.  When rates go
back up, say to double what they are now, watch out.  Interest
payments approaching 40% of tax revenues are not out of the question.

Another aspect of that is just as the lower demand for capital
currently holds interest rates down, when that begins to change the
governments contribution to that demand accelerates the increase in
interest rates since it is a huge consumer of that capital.  This is
what Al Gore spoke about when he was running for Prez and argued
against the huge tax cuts we have seen.  Unfortunately, Al is much
better as a policy wonk and at understanding what to do than he is at
explaining these things and convincing the average voter.

Look at it this way, if we had no debt, your taxes would be 25% lower.
 An outrageous idea I'd like to offer is that we not only should not
have a debt, but should have a national endowment so that eventually
we don't have taxes in this country.  Absurd?  Maybe.  It sure would
eliminate the idiotic games played  with the tax code though.

Politics aside, I'm not sure the question got answered.  

There have been many cases historically where countries had dept that
was out of control.  One big result is that interest rates skyrocket. 
Nominal rates consist of two components: the real interest rate and
inflation.  Real interest rates go up because there is now a lot of
risk included in holding the bonds (or cash) of that country.  This is
of course bad because it raises the real cost of borrowing for the
country, and when they want to invest in infrastructure, it will cost
that much more.  Inflation almost always goes up because the country
has to start printing tons of cash to pay the interest. This waters
down the currency.

Alternatively, the country could just default on it's debt. This has
happened many times as well.   Then, all the bond holders are wiped
out. The real interest rate for the country goes way up because noone
will loan them money without getting compensated for the risk.  The
currency collapses because noone wants to hold it.  The country has
big inflation because noone wants to accept the money in exchange for
real goods or services. The net is almost the same as if they don't
default and just print cash to pay.

Finally, whoever said "debt it bad period" is wrong. Debt is fine. Ask
the millions of home owners who borrow money to buy a house.  Home
mortgages are form of debt.  What about using a credit card to pay for
dinner?  It's a lot easier than cash, and if you pay your bill on
time, it's free.  A basic principle of finance is that you want to pay
for something as you consume it. If you're buying a car that will last
you for five years, you should feel OK about paying for it over that
five years. No one would ask a young family to own their home outright
before they move in. What is bad about debt is borrowing to pay for
current expenses. In other words, people, and countries, should live
within their means.