text: how does the federal deficit affect the economy? the u.s. national debt is huge yet the economy is still fairly stable. is there a point where the debt causes the economy to come crashing down? yes, but no one knows where that point is.  government debt increases the cost of capital.  capital is bought and sold like any other commodity.  when you buy capital, the transaction is called a "loan" or "mortgage."  government debt reduces the supply of capital and thus increases the cost (interest rate) of borrowing money.  this inhibits business by making it harder for businesses and individuals to borrow money.  if government debt becomes too large, business comes to a standstill and the economy would be in danger of collapsing.  no one thinks that the us economy is in danger of standing still or collapsing from government debt.