By John W. Schoen Senior producer
updated 11/16/2008 4:37:36 PM ET 2008-11-16T21:37:36

This week a 13-year-old reader from Topeka wants to know: What is the government going to do about paying down the gigantic national debt? We wish we had a better answer. Another asks: What happens if investors stop buying all our debt?

I'm really worried about the national debt. Our country owes over $8 trillion. Trillion! I live in Topeka, Kan., and although I'm just 13 years old, I know that I'm going to be part of the millions of people who are going to be paying for this debt (if we ever pay it off). I want to know how the government plans to help us solve this huge problem.
Leobardo E., Topeka, Kan.

You are quite right to be concerned, Leobardo. I wish more members of our government shared that concern. The only honest answer is: There is no plan.

You’re also right about your generation inheriting the debt that has been generated by my generation. If you haven’t already, maybe you want to sit your parents down and have a little talk about it.

As of Nov. 13, the U.S. national debt was $10,578,639,151,691.13 (that’s $10.5 trillion) and growing by about $3.8 billion every day. About $6.2 trillion of that debt is from Treasury bonds sold to a variety of investors, including foreign governments.

Another $4.3 trillion is held by our own government – mostly in the Social Security and Medicare trust funds. These funds have been collecting more than they spend, saving for the day when my generation retires and starts collecting retirement checks and needs health coverage to pay our doctor bills and buy medicine. Those savings could have been stashed in a bank account. But the Treasury needs the money to make up for the years the government spent more money than it collected in taxes. Voters like to see cuts in taxes, not in services.

Though $10 trillion looks like a big number, keep in mind that the U.S. economy is generating about $13 trillion every year, which means the debt is about 80 percent of GDP. On that basis, we’ve seen it go higher in the past; during World War II , the national debt was more than GDP.

If our government can figure out how to set taxes and spending at the same level, and the economy keeps growing, the debt will get smaller in relation to the economy. If that happens the burden on your generation won’t be so bad. The only way to do that is to raise taxes or cut services - or both. It doesn’t look like that’s going to happen any time soon.

The government isn’t alone in borrowing too much money. American consumers have borrowed $11.5 trillion in mortgages and another $2.5 trillion in credit card, car loans and other debts. Banks and Wall Street investment firms borrowed tens of trillions of dollars more to create complex investments that now are worth a lot less than everyone thought.

Now, the Treasury and the Federal Reserve are using trillions of dollars more to try to clean up the mess. As they do, the debt pile probably will grow. Some day, that will have to be paid back too.

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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