B2IshaniResearchNotebook

Likos, Paulina. “Financial Planning for Millennial Investors – US News & World Report.” How the National Debt Affects Your Investments, US News, 25 Jan. 2021, https://money.usnews.com/investing/investing-101/articles/how-the-national-debt-affects-you. 

Direct Quote: Investors need to be aware of what rising national debt means for the future of our economy and financial markets. More government bonds cause higher interest rates and lower stock market returns. As the U.S. government issues more Treasury securities to cover its budget deficit, the market supply of bonds increases and the existing bonds earn fewer profits at their fixed-interest rate. This makes the bonds less appealing. “When you have more of something, it gets cheaper,” says Jim Barnes, director of fixed income at Bryn Mawr Trust. While bonds can provide investors the benefits of cash preservation and fixed income, they carry interest-rate risk. Bonds and interest rates have an inverse relationship. When interest rates rise, newly issued bonds are more attractive than existing bonds because they provide investors with higher yields. As a result, prices on old bonds tend to fall.

Summary/My Interpretation: As the US deficit continues to grow, the future of investment becomes increasingly more uncertain. More specifically, the US deficit hinders the private sector through several different ways. Since the US sells securities for cash it causes there to be less income flow. This is problematic as it means that less investment can take place than in the past. Additionally, since these bonds will be sold with a higher interest rate than those previously administered, it leads to a depreciation of value for older securities. 
How I Plan To Use This in My Project: When looking at the article, I think the author does a good job at explaining in detail how exactly increasing debt can hurt the private sector. As of now, I plan to use this article to show how the debt will widdle down the US economy over time. One of the most common arguments against solving the debt crisis is that people don’t believe the debt impacts the economy. However, this article explains that impacts do not happen immediately. More specifically, the debt will slowly crowd out the private sector until investment becomes extremely difficult in the US economy. Additionally, I also plan to use this article to detail another potential impact the debt may have on middle class families.

Berman, Noah. “What Happens When the U.S. Hits Its Debt Ceiling?” What Happens When the U.S. Hits Its Debt Ceiling?, Council on Foreign Relations, 20 Jan. 2023, https://www.cfr.org/backgrounder/what-happens-when-us-hits-its-debt-ceiling. 

Direct Quote: Experts say a U.S. default could wreak havoc on global financial markets. The creditworthiness of U.S. treasury securities has long bolstered demand for U.S. dollars, contributing to their value and status as the world’s reserve currency. Any hit to confidence in the U.S. economy, whether from default or the uncertainty surrounding it, could cause investors to sell U.S. treasury bonds and thus weaken the dollar. Over half of the world’s foreign currency reserves are held in U.S. dollars, so a sudden decrease in the currency’s value could ripple through the market for treasuries as the value of these reserves drops. As heavily indebted low-income countries struggle to make interest payments on their sovereign debts, a weaker dollar could make debts denominated in other currencies relatively more expensive and threaten to tip some emerging economies into debt crises.

Summary/My Interpretation: In the status quo, the US dollar receives its value from a variety of different sources including the securities the government sells to those who invest in the nation. If the US were to hit its debt ceiling, it would signal that the nation’s deficit is growing at a rate that the government can’t control. This is problematic as it would cause investors to lose faith in the securities previously sold to them, leading to a depreciation of the currency. Overall, this would cause global turmoil as the dollar is the world’s reserve currency, leading to a drop in almost every nation’s GDP. 
How I Will Use This In My Project: As a whole, I want to use this article to take my paper that primarily focuses on domestic impacts and implicate it to a larger scale. Specifically, I want to show that the US amassing too much debt not only has the potential to send the world economy into a recession, but also will impact middle class families that don’t necessarily live in the nation. I think that this is an interesting idea because when I originally started exploring my research question I thought I would be focusing solely on families in the US. I am not exactly sure if this is where I want to take my project yet but I definitely am going to keep looking into this concept.

Berman, Noah. “What Happens When the U.S. Hits Its Debt Ceiling?” What Happens When the U.S. Hits Its Debt Ceiling?, Council on Foreign Relations, 20 Jan. 2023, https://www.cfr.org/backgrounder/what-happens-when-us-hits-its-debt-ceiling. 

Direct Quote: Even short of default, hitting the debt ceiling would hamstring the government’s ability to finance its operations, including providing for the national defense or funding entitlements such as Medicare or Social Security.

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the U.S. financial market and tip the economy into recession. Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt about one-tenth of U.S. economic activity. According to center-left think tank Third Way, a breach that leads to default could cause the loss of three million jobs, add $130,000 to the cost of an average thirty-year mortgage, and raise interest rates enough to increase the national debt by $850 billion. In addition, higher interest rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education, and health care.

Summary/My Interpretation: One of the most important tools the government uses to control the growing deficit is the existence of the federal debt ceiling. The debt ceiling sets a limit on the maximum amount of debt the US can accumulate before the nation defaults on its loans. Experts believe that even without a default, hitting the debt ceiling would be catastrophic for the economy as it would divert funds away from social programs and relocate them to combating the debt. Overall, simply even hitting the debt ceiling would cause the US to incur trillions in losses. 

How I Will Use This In My Project: As a whole, I plan to use this article as a way to introduce what the debt ceiling is as well as explain its importance. More specifically, I plan to phrase the debt ceiling as a limit that the US continues to get closer to each year. Although the government can raise this value, politicians are becoming increasingly reluctant to do so as it causes the debt to balloon further. Additionally, I also want to use the statistics in this article as they provide concrete figures of what hitting the debt ceiling would look like. 

Paulson, Mariko. “Explainer: Capital Crowd out Effects of Government Debt.” Penn Wharton Budget Model, Penn Wharton Budget Model, 10 Aug. 2021, https://budgetmodel.wharton.upenn.edu/issues/2021/6/28/explainer-capital-crowd-out-effects-of-government-debt. 

Direct Quote: “In the case of taxes, the taxed entity may reduce investment in real capital because of its smaller after-tax budget. If government expenditures do not cause an offsetting increase in capital investment elsewhere in the economy, then the government’s policy reduces the total capital stock. Note that higher taxation may actually increase investment, as can happen when corporate investment is partially expensed and tax rates rise, thereby creating a tax incentive to shift cash flow from shareholder distributions and toward investment. In the case of debt issuance, the government collects real resources via voluntary transactions with economic agents who are willing to trade real resources today for the promise of real resources in the future. Debt buyers, including U.S. households saving for retirement, view this debt as savings, which reduces their savings in private investment. This substitution is called the ‘capital crowding-out effect’ from government debt issuance. National saving, therefore, is reduced more when the new government debt is used to finance more immediate consumption (e.g., social transfers) compared to longer-term public investment (e.g., roads and pre-K education)” .

Summary/My Interpretation: As the US continues to invest in programs, it requires an increasing amount of capital. This causes the government to sell its debt to the public in exchange for the promise that they will be paid back in the future. This is problematic because as the US continues to sell its debt, it causes the amount of capital in circulation to fall. As capital drops, there is less investment/activity in the private sector, causing economic output to drop.

 How I will use this in my project: As a whole, this article does a good job at explaining how the national debt can hurt economic growth. Specifically, as the private sector gets crowded out, it causes there to be less total economic growth. I plan to use this idea to link changes in the federal debt to the effects it has on middle class families, such as reducing the number of opportunities available to them.

Gould, Hilarey, and Kimberly Amadeo. “How Did the U.S. National Debt Get So Big?” The Balance, The Balance, 4 Oct. 2022, https://www.thebalancemoney.com/the-u-s-debt-and-how-it-got-so-big-3305778. 

Direct Quote: “In the short run, the economy and voters benefit from deficit spending because it drives economic growth and stability. The federal government pays for defense equipment, health care, building construction, and contracts with private businesses. New employees are then hired and they spend their salaries on necessities and wants, like gas, groceries, new clothes, and more. This consumer spending boosts the economy. As part of the components of GDP, federal government spending contributes around 7%. Over the long term, debt holders could demand larger interest payments, because the debt-to-GDP ratio increases, and this high ratio of debt to gross domestic product (GDP) tells investors that the country might have problems repaying them. That’s a newer—and worrying—occurrence for the U.S. Back in 1988, the national debt was only half of what the U.S. produced that year. Lower demand for Treasurys also puts downward pressure on the dollar because its value is tied to the value of Treasury securities. As the dollar value declines, foreign holders get paid back in a currency that is worth less than when they invested, which further decreases demand. Many of these foreign holders would become more likely to invest in their own countries. At that point, the U.S. would have to pay higher interest payments”.

Summary/My Interpretation: One of the most controversial topics in the US is whether or not the nation should continue to increase its federal spending. Whenever the nation invests more into programs, it spurs economic growth in the short run as jobs are often created and there is an increase in the amount of money in circulation. However, while the economy is boosted in the short run, the deficit ultimately hinders growth overtime. Specifically, as the US continues to amass debt, investors start to lose confidence that the nation will pay them back. This causes them not only to demand their money back but also causes the US dollar to depreciate in value.

 How I will use this in my project: This article does a good job at explaining the inherent trade off that exists when looking at federal spending. More specifically, it highlights how increasing the deficit spurs economic growth in the short run but will eventually hurt the nation’s GDP as it drives down investor confidence. I plan to use this article as a way to explore the debate that exists between those who support increasing the deficit and those that believe we should be working to solve the debt crisis. Additionally, I also plan to use this article as a way to show how increasing the debt has helped the US, such as how it played an essential role in implementing FDR’s New Deal.