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Friday, February 4, 2011

How the U.S. national debt affects average citizen's personal finances

How the U.S. National Debt affects average citizen's personal finances depends on the correlation of that debt with economic conditions and variables such as inflation, dollar valuation, cost of capital etc.

Since Government is the regulator of a country, a national marketing agent, and administrator of Federal services, a high debt can affect all these things and all those businesses, institutions, employees, and programs related to them.

The economy is affected by more than just national debt however; the affects of the debt on individuals may be subdued. Nevertheless, when high national debt is a significant problem it may lead to individual finance related concerns in the following ways:

• Income limitations, furlough, or reduction
• Higher cost of living
• Increased taxes
• Decreased spending power
• Lower performance on investments
• Decline in availability of capital

This article will discuss the above listed potential negative affects of high national debt in terms of   debt, currency valuation and capital,   money supply and   cost of living. Moreover, as alluded to in paragraph 1 of this article, exactly how much national debt is too high varies on a number of economic, administrative and political factors.

Even so, high debt means the same thing for Government as it does for a business, family or individual. Consequently, the U.S. National Debt may in some cases negatively affect the average citizen's opportunities, spending power, federal assistance, and costs. It does this through the economic, budgetary, and financial repercussions of the debt as illustrated henceforth.

National debt, the dollar and cost of capital

When the national debt is too high, it can undermine the credibility of a Government that in turn affects the public. This is why not having too much debt is critical for a national Government. When debt becomes too high, confidence, investment and liquidity in a country, its money, economy and people can wane thereby affecting the following factors that in turn affect the average citizen's personal finances.

i) Valuation of the dollar:

High debt can mean a low valued dollar due to lack of confidence in the economy as related to debt. When the value of the dollar declines, it takes more money to buy the same tings be they household products, business investments, imported goods etc.

ii) Lower foreign investment:

Foreign national investment may decline when other countries find reason to believe the high national debt may negatively affect the country's economic performance. In other words, it foreign investors feel their investment opportunities in a country are jeopardized, they may invest less.

iii) Higher cost of capital:

When debt rises, the cost of capital for consumers can rise thereafter due to either decreased value of currency and/or limited government funding through monetary policy. When monetary policy limits money supply the cost of capital rises for consumers through higher interest rates as is the case with lower currency values.

Less money for everyone

Creditors expect higher ROI when national debt soars
Rising national debt  lowers Americans' spending power
A higher national debt also means less money for government programs, industry, businesses and individuals. Moreover, when the Government has less money, it follows the same applies for the economy, the businesses and people within that economy. These decrease in the availability of money may be evident in the following ways:

i) Limitations on business subsidies:

Business subsidies come from earmarks and legislated government programs. When the government has less money, so to does the availability of money for such federal assistance. This in turn can impact business success which affects the wealth of business owners, and valuations thereby potentially lowering the value of retirement accounts, investment accounts, managed finances etc.

ii) Decline in Business investment:

If businesses notice the debt is impacting both subsidies and the ability of the economy to perform be it through higher taxes, lower liquidity or decreased consumer confidence, a decline in business investment may occur. This affects the average American by reducing the availability of goods and services through operational cutbacks within a cautious commercial enterprise. This can also negatively affect performance of public investment in both private and public firms.

iii) Reduced incomes and fewer jobs:

Government and business cut backs can also mean increased unemployment, income furloughs, reduced pay raises etc. When income and jobs decline, financial pressure becomes a problem for a larger amount of people.

Increased cost of living

Since economic conditions are at least partially linked and correlated to the national debt, a negative national debt can affect the consumer price index, taxes, and government services that are then privately attained by individuals.

In other words, the cost of goods and services can go up because of a potential decline in the value of the dollar and in order to pay for the debt, the government may increase various taxes such as sales tax, excise tax, sin taxes etc. and/or cut back in government programs that can lubricate the economy and cost individuals in compensation for such services.

i) Inflation:

Cost of goods and services may rise for a number of reasons related to debt. For example, the combined affects of lowered business, international and consumer confidence in the economy may lead to a decline in wealth overall. This can lead to inflation through an increase in costs passed onto the consumer.

ii) Higher tax-payer burden:

Excise, sales, business or income taxes may rise as a government measure to pay off the national debt. When taxes rise, less consumer income is retained making the same amount of income buy less in after tax dollars, thereby limiting the standard of living.

iii) Decreased services:

Lower services cost consumers time and money because they may require private alternatives to those services. For example, limitations in educational programs may spur the need for private education just as cut backs in government agencies such as tax services may necessitate an increased reliance on private tax services that cost consumers directly. When coupled with higher taxes, this can double the cost to the consumer.

Image: Wiki Commons CC BY-SA 3.0

1 comment:

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