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The national debt just passed $36 trillion, reigniting debates over spending, growth and taxes. But how serious is it, and how will it affect everyday Americans? Ãå±±½ûµØ Today caught up withÌýShaun Davies, associate professor of finance at theÌýLeeds School of Business, to break down what you need to know.

Shaun Davies

Let’s start simple. What’s the difference between the deficit and the national debt?

The deficit is what happens when the federal government spends more than it collects in a given year. So if the government takes in $4 trillion in tax revenue but spends $5 trillion, the deficit would be $1 trillion. To cover that gap, the government issues debt—for example, U.S. Treasury bonds. The national debt is the total amount we owe from running deficits over time, minus any surpluses, which we have not had since 2001.Ìý

So the U.S. owes over $36 trillion. Should we be concerned?

Yes and no. That level of debt could be sustainable if we keep it in check and the economy continues to grow. But our debt-to-(gross domestic product) ratio is now around 120%, which means we owe more than we produce in a year. That’s a red flag. Unfortunately, under both Republican and Democratic leadership, we’ve seen very little fiscal discipline. The real concern is the growth rate of the debt.

How do we compare to other major economies?

We’re in the middle of the pack. I’d give us a C, maybe a C-minus. We’re in better shape than Japan, which has a massive debt load relative to its GDP. But we lag behind most European countries, which tend to keep their debt under 100% of GDP. So we’re not failing, but we’re definitely not excelling.

What are some of the biggest myths about the national debt?

Interest rates are one of the most misunderstood pieces. The Federal Reserve has some control over interest rates, but much less than the average person realizes. The Fed sets short-term rates, like what banks charge each other for overnight loans. But longer-term interest rates—like those on 10-year Treasury bonds, mortgages and auto loans—are determined by the market. If investors get spooked about the U.S. debt, they’ll demand higher returns for holding that debt, which means higher interest rates for all of us.Ìý

President Donald Trump’s tax cut and spending bill is projected to add $3 trillion to the debt over the next decade. What’s driving that?

It’s simple math: less revenue and more spending. Tax cuts reduce what the government brings in. New spending increases what it pays out. On top of that, higher interest rates mean the government has to pay more just to service its existing debt. That cost is growing fast.

Is this projected debt increase unusually large?

These large deficit increases are becoming more common—2017’s tax cuts, the COVID relief bills, the Inflation Reduction Act. But just because it’s common doesn’t mean it’s wise. If something keeps making you sick, you probably shouldn’t keep eating it. The troubling trend is not just the level of debt, but how fast it’s growing.

How does the national debt impact the average American?

In the short term, it’s mostly political noise. If you tune it out, you probably won’t notice much. But long term, if the U.S. needs to issue a ton of new debt and the market loses confidence, interest rates could spike. If we're not careful, we could see mortgage rates exceed 10% and maybe even more. Again, longer term interest rates are set by the market, not the Fed. If the market loses faith, look out.Ìý

What trade-offs might we face if borrowing continues at this scale?

At some point, we have to get serious about reducing the debt-to-GDP ratio. That likely means higher taxes and lower government spending. It will be unpleasant, but financial stability demands it.Ìý

What’s the worst-case scenario if debt keeps growing unchecked?

The U.S. government can’t go bankrupt in the way a company can—it can always print more money. But that would lead to serious inflation. If the world loses faith in the U.S. dollar and our bonds, we could see a spike in interest rates, the dollar could weaken considerably, and economic growth will come to a standstill. It will be a dark day. We need to take our medicine now.