A teenager asks: Who'll pay the national debt?

Even when all that debt is paid off, your generation will likely face another big debt problem. Remember the money that the government has set aside for Social Security and Medicare benefits? It’s not going to be nearly enough to pay the bills for those of us who will be relying on Social Security to pay for retirement and on Medicare to take care of us when we get old and sick. There are various estimates out there. The government’s own accountants at the GAO figure it will take another $40 trillion.

Earlier this year, Richard Fisher, the president of the Dallas Federal Reserve, gave a speech in which he figured Social Security will need another $13.6 trillion to cover retirement checks to people like me. Medicare will need something like $85.6 trillion to pay our medical bills.

Borrowing money to enjoy a better life today has, until very recently, become ingrained in the American way of life. As we’re now finding out the hard way, it’s not sustainable. And when the bills come due — as they’re beginning to now — life gets much tougher.

We’re been through hard times before, and we’ll get through it this time. The good news is that, like the generation that preceded mine and lived through the Great Depression, it’s almost certain that your generation will be more responsible about borrowing money.

As for what’s being done to fix this mess, there is no good answer. These problems have been known for some time, and our government has spent years debating what to do about it. So far, it hasn’t come up with a solution. If nothing is done soon, it will be the greatest failure of my generation. And you’ll have every right to be extremely angry about it. I know it won't help much, but my generation owes your generation a huge apology.

What's the impact to me if investors and others stop buying U.S. debt? I've heard lots of columnists say that as the U.S. debt increases, it's less likely that we can borrow money or at least we'll have to pay a higher interest rate. Is this something I'd notice in service cuts, government layoffs, etc., or would nothing seem to change?
-Matt K. Tacoma, Wash.

If or when investors lost their appetite for U.S. Treasury debt, you would notice the change.

If investors gradually decided they didn’t like our debt, the Treasury would simply increase the amount of interest paid on newly issued debt. This is how long term interest rates are determined. (The Federal Reserve sets only very short-term interest rates that apply to banks lending to each other. Banks also peg their so-called prime rate to the Fed’s short-term rate.)

Every time the Treasury auctions debt, it takes bids from investors who want to buy it. Whoever bids to accept the lowest interest rate wins the bid. That helps the Treasury keep borrowing costs low.

Demand for Treasury debt has its ups and downs. When the dollar is falling, for example, investors usually want a higher rate to make up for the impact of that falling dollar on their investment. Those higher rates push up the cost of other long-term loans like mortgages.

Credit has become much harder to get — but not because of a lack of investor interest in Treasuries. The problem is that banks are afraid to lend because the system is still riddled with private debt — mostly backed by mortgages — that may go bad. Most mortgages will be fine, but they’ve been so scrambled up in complex pools of securities that no one knows exactly who’s holding the bad ones. It’s kind of like someone offering you 10 glasses of water and then telling you one of them is poison — but they can’t tell you which one. That makes it pretty risky to take a drink.

The good news is that, despite the current financial turmoil, a rapidly slowing economy and huge the levels of U.S. debt, investors around the world are still snapping up Treasuries as fast as they’re printed. For the time being, the U.S. Treasury is still seen as the safest place to put your money. That strong demand has helped give the dollar a big boost in value against other foreign currencies.

It’s impossible to predict how long that will last. These days, it’s impossible to predict just about anything related to the economy or financial markets.

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