Why Can’t We Simply Add to the U.S. Debt Indefinitely?

BY busadmin  March 1, 2010 at 12:12 PM EDT

Question: I am told over and over that the federal debt will lead to inflation and that our children and grandchildren will have to pay it back. I have heard this so often that I am starting to doubt it. If such statements are true, we should be paying off the debts of our grandparents. That does not seem to be happening

Federal debt seems to be simply numbers in a database in a computer. Why can’t we simply continue to let those numbers increase without limit? When we borrow money, aren’t we just adjusting number in a data base? Why does debt at the national level matter? If we were trading gold or wheat I can see the problem, but we seem to just be trading computer digits. Why can’t that continue forever?

Paul Solman: It can and will. But at what cost? The problem is the PRICE of borrowing more money to pay off the debts of the past. Look what’s happening to Greece right now. Investors think it can’t meet its obligations. So they demand a higher interest rate for continuing to lend and fund Greece’s national debt. That ups the debt and leads to further doubt.

This same vicious circle is what forced the government to take over Fannie Mae and Freddie Mac: investor doubts leading to higher interest rates leading to bigger shortfalls leading to bigger doubts.

Can it happen to America? You tell me.