The national debt recently topped $20 trillion.  This pales in comparison to the unfunded liabilities, which, by some estimates, are over $200 trillion.

The continual deficits and accumulation of government debt is a major problem.  Unfortunately, many people mistakenly believe that we are just burdening future generations.  In a sense, this is correct.  But they fail to realize that we are burdening ourselves right now.

When the Federal Reserve monetizes the debt (creates money out of thin air to buy the U.S. government debt), then it is a little more obvious for those who are paying attention.  The central bank’s creation of money means there is more money circulating, while it has done nothing to increase the production of goods and services.  This eventually means that our dollars are worth less than they otherwise would have been.

Although interest rates are still near historic all-time lows, the Fed has essentially not been buying U.S. government debt for nearly 3 years.  It has only rolled over maturing debt.  QE3 ended in October 2014.  Since that time, the adjusted monetary base has been relatively flat, or even slightly down.

This means that investors are buying U.S. government debt at low rates.  This could also include foreign central banks, although Japan and China – the two major buyers – have not been big buyers over the last few years.

Whether or not it is smart for private investors to buy U.S. government bonds is a separate issue.  U.S. government debt is still seen as something of a safe haven.  As long as there is no significant consumer price inflation, this will probably hold true.  And although interest rates are low, they could go lower in a recession, which means that the value of the bonds will increase.

But are these investors misallocating resources?  In a sense, they are.  But it is really the government spending the money that is the misallocation.  The bond investors are just helping to fund it at lower rates.

And this is where we are still harmed today.  The government is misallocating resources.  Virtually all government spending is a misallocation of resources unless it is spending money that would have been spent that same exact way anyway.  But if people were voluntarily willing to spend money building statues in a park, then it wouldn’t be necessary for the government to compel it.  Of course, you could make the argument that some people might be willing to voluntarily contribute to building statues in a park if it weren’t already being done by the government.  But we can be sure that not everyone would choose to spend their money in this way.

To be sure, most of the money spent by government at all levels has little to do with defending property and enforcing contracts.  All other spending has to be a misallocation or, at best, moot.  This isn’t to say that some people don’t benefit at the expense of others with certain types of spending.  But on net, we are poorer when government spends money, as it is allocating resources that are not in accordance with the highest preferences of consumers.

When the government accumulates debt, it is spending extra money that it cannot get away with spending through direct taxation.  It is a hidden form of taxation.  But it isn’t just hurting future generations.  It is hurting us economically now.  It is diverting real resources to other uses than what would otherwise be freely chosen by consumers in an open market.

Debt does hurt future generations as well.  But the main way it hurts future generations is that we are reducing advances in production and technology now.  We are reducing the rate of compounding growth.

Imagine if the whole world hadn’t advanced for 2,000 years up until the year 1950.  Even if free markets were introduced at that time with substantial growth, we would be far poorer today.  People would have had to invent electricity, airplanes, automobiles, the telephone, and so many other things after this period.  We would be really poor today if this had been the case.  We build off of previous generations.

In conclusion, it doesn’t matter who is buying the U.S. government’s debt.  The problem is that the U.S. government is spending so much money and misallocating resources.  We are poorer than we otherwise would be.  This accumulation of debt hurts our living standards today.