What happens if the government keeps borrowing trillions?
If the government keeps borrowing trillions, it becomes one more giant borrower competing for the same pool of savings. That pushes interest rates up for everyone. Your mortgage, your car loan, and a company's factory loan all get more expensive. Over the years some of those investments never happen, so the economy grows a little slower. And a bigger chunk of the budget goes just to pay interest.
Watch it happen, step by step
The government keeps borrowing trillions
Loanable Funds MarketIf the government keeps borrowing trillions, it becomes one more giant borrower competing for the same pool of savings.
The market for loans
In this market, savers put money in through banks and retirement accounts. Borrowers take it out to buy homes, build businesses, or fund the government. The price here is the real interest rate, which is just the yearly cost of borrowing. It starts where the money savers offer matches what borrowers want.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
Who comes out ahead
- Savers and retirees, who finally earn more interest on their savings accounts and bonds
- Whoever the government spends the borrowed money on today, such as seniors, troops, or contractors, who get the benefit right away
- Banks and lenders, who collect a higher rate on every loan they make
Who pays for it
- Homebuyers and car buyers, who pay more each month on the very same loan
- Businesses and startups, whose planned factories and new hires never get funded once loans get too pricey
- Future workers, whose paychecks grow more slowly because there are fewer tools and machines to work with
- Future taxpayers, who watch a bigger share of the budget go just to interest on old debt
When the economy is in a deep recession, lots of savings sit idle and unused. Extra government borrowing then crowds out very little. The squeeze mainly bites when nearly everyone who wants a job already has one and savings are fully in use.
Common questions
- Does government borrowing raise interest rates?
- Usually yes, at least a little. When the government borrows heavily, it competes with families and businesses for the same pool of savings. That extra demand pushes the interest rate up. How much depends on how much unused savings and how many idle workers the economy already has.
- What is crowding out in simple terms?
- Crowding out is when government borrowing pushes private borrowers out of line. Higher rates make mortgages and business loans pricier, so some homes and factories that would have been financed never get built.
- Will the national debt hurt me personally?
- Over time it can. Bigger deficits tend to mean higher borrowing costs today and slower wage growth later. More of your taxes also go just to pay interest, instead of funding services you use.
- Can the government just keep borrowing forever?
- It can keep borrowing, but not for free. The more it owes, the more of each year's budget goes to interest. That leaves less for everything else and can push borrowing costs even higher.
More questions like this on the What If hub, or go deeper with the AP graph walkthroughs.