How the Federal Debt and Deficit Are Different:
The U.S. Debt exceeded $17 trillion on October 17, 2013. This is nearly three times the debt in 2000, which was $6 trillion.
How Does the Deficit Affect the Debt?:
In addition to the public debt, there is the money that the government loans to itself each year. This money is in the form of Government Account Securities, and it comes primarily from the Social Security Trust Fund. These loans are not counted as part of the deficit, since they are all within the government. However, as the Baby Boomers retire, they will begin to draw down more Social Security funds than are replaced with payroll taxes. These benefits will need to be paid out of the general fund. This means that either other programs must be cut, taxes must be raised or benefits must be lowered. Unfortunately, legislators have not yet agreed on an effective plan to meet Social Security obligations.
How Does the Debt Affect the Deficit?:
Second, the interest on the debt is added to the deficit each year. About 5% of the budget is allocated to debt interest payments. Interest on the debt hit a record in FY 2011, reaching $454 billion. This beat its prior record of $451 billion in FY 2008 -- despite lower interest rates. By the FY 2013 budget, the interest payment dropped to $248 billion, as interest rates fell to a 200-year low. However, as the economy improved, interest rates rose starting in May 2013. As a result, interest on the debt is projected to quadruple to $850 billion by FY 2021, making it the fourth largest budget item. (See Budget Spending)
How Does the Deficit and Debt Affect the Economy?:
However, not every dollar creates the same number of jobs. In fact, military spending creates 8,555 jobs for every billion dollars spent. This is less than half the jobs created by that same billion spent on construction. For more, see Unemployment Solutions.
In the long run, the resultant debt is very damaging to the economy, and not only because of higher interest rates. The U.S. government may be tempted to let the value of the dollar fall so that the debt repayment will be in cheaper dollars, and less expensive. As this happens, foreign governments and investors will be less willing to buy Treasury bonds, forcing interest rates even higher.