U.S. National Debt: Cause for Concern - Example

U.S. National Debt - Cause for Concern? Introduction Since the early 80s, the United s has managed acurrent deficit account; however, it placed the country in a situation where it continued piling its obligation to foreigners. Foreigners are often interested in holding dollar assets and as such, have continued to finance the United States with the capital needed for surplus spending. The strength of the dollar in terms of being the leading reserve currency globally has ensured that the United States continue borrowing to finance various projects. However, the capital inflow into the country appears to impact negatively as evident in the higher interest rates and the creation of debts that are difficult to service. At the moment, the debt owed by the Federal Government is over $14trillion and regarded as the largest in the world when it comes to debts owed by different countries (Barth & Li, 2012). On the same note, the debt is considered to be higher than what the country produces annually. This to some extent tends to discourage prospective investors who move to other countries due to uncertainty regarding loan repayment. As such, the U.S national debt is a worrying trend compared to where the country stood at 1998, where the national debt was half the figure presented currently as the national debt (Barth & Li, 2012). This paper examines reasons why the U.S national debt is a cause for concern. Reasons for the large U.S national debt In essence, the national debt is as a result of an accumulated Federal budget deficits contributed, for instance, by the economic stimulus package and the tax cuts. The military spending also contributed to the large U.S national debt. Further, the national debt began to surge prior to the 2008 economic downturn. Prior to 2008, the national debt stood at averagely $9trillion; however, the bailout increased the debt to $10.5 by the end of 2008. Foreign countries such as Japan and China also keep buying treasuries despite the rising national debt (Barth & Li, 2012). On the other hand, the foreign holders of the country’s debt are focused more on investing in their economies. As a result, it could reach a point where the demand for U.S treasuries diminishes thus increasing the interest rates and slowing down economic growth. When the dollar loses its value, the foreign holders are paid using currency, and this tend to decrease the demand for the dollar. The country has also borrowed from the Social Security Trust Fund to finance the increasing deficit spending. While the loan has helped the Government to keep the interest rates low, its repayment means there will be a need to increase taxes especially at the time when the Boomers retire (Clayton, 2005). How the national debt affects the economy While citizens benefit from deficit spending in the short run, there is still a concerning regarding the increasing Federal debt over a longer period. A major concern regarding the rise in Federal debt involves, for example, a decline in economic growth. Further, due to the rising debt, it is possible that debt-holders such as China, for example, can ask for larger interest payments as a way of spreading risk in case they are not repaid. Consequently, the United States is in a precarious situation where it might end up paying large sums for interests alone. In addition, a debt crisis is looming in the sense that, it is possible that Federal Government might experience challenges paying retirement benefits to the Baby Boomers as initially promised. As a result there will be a need for the Federal Government to raise taxes since the increasing debt means that the United States cannot borrow from other countries in order to service its debts (Clayton, 2005). On the other hand, the stimulus package did not change the economic crisis experienced by the United States. However, it has contributed to the accumulation of the country’s national debts. The consequence in this sense involves a negative impact on the future economic growth. At the moment, the country is headed on a dangerous path with regard to its spending and debt accumulation. The impact of the increasing debt, for example, will be more severe for the poor, middle class and the senior citizens. When interest rates are high, most creditors tend to lose confident in the Government’s ability to pay its debt. In most cases, interest rates tend to increase as a result of the Government’s involvement in selling more debts which bond holders are not willing to purchase at the current price. As such, higher interest rates results in a vicious cycle of debt accumulation (Clayton, 2005). The higher interest rates also have a ripple effect on domestic investment that includes, for example, mortgages and business loans. As a result, purchasing a home or starting a business would be a challenge for Americans. Higher interest rates also create a weaker economy where there are few opportunities, and this tends to impact negatively on economic growth. Higher inflation is another consequence of accumulating larger debts as a result of replacing its debt with currency. However, while the government through the Federal Reserve can increase or inflate the money supply, such an endeavor also impacts negatively on economic growth. For example, inflation tends to adversely affect individuals on fixed incomes that include, for example, the senior citizens who depend on pension (Barth & Li, 2012). Inflation can also push American citizens to poverty as a result of an increase in the price of consumable goods or products. As a result of inflation, more elderly in the country can become highly dependent on Social Security. The purchasing power of consumers in the country can also be affected as a result of inflation. Consequently, this has a ripple effect on the businesses that depends on the purchasing power of consumers. On the same note, the decline in business can also force employers to downsize their staff thus increasing the unemployment rate in the country. On the other hand, severe inflation can also have an impact on the dollar’s status as the primary reserve currency globally. Further, the high debt could also have an impact on the confidence of the country’s economy and the monetary policy regime (Matthews & Driver, 2013). How the national debts affect American citizens When there is a surge in interest rates, accessing loans, for instance, would be costly for the ordinary families in America. As a result, most families in America would be forced to post pond, for example, taking a loan as a way of consolidating their financial security. The start-up capital needed by entrepreneurs would also be out of reach for the ordinary Americans. Families will also feel pinched in terms of buying goods that they need at home as a result of inflation (Clayton, 2005). The unemployment rate is also likely to increase due to fewer opportunities for citizens in the job market. For instance, if immediate measures are not taken, the country runs a risk of finding itself in a situation similar to the crisis currently experienced by Greece. On the other hand, while the low-interest rate has worked to the Government’s advantage, it is expected that the favorable situation may not last longer. At the moment, the country appears to depend on its foreign investment finance a significant part of its overall debt. However, while foreign investors continue to buy the Treasury bonds, their terms appear exploitative (Matthews & Driver, 2013). The strategy to deal with the rising national debt The United States at the moment is facing a looming crisis with regard to the rising national debt. As such, the situation can further escalate if the Congress and the President do not take immediate action to address the problem. While the normal spending is about 20.2%, this has increased to over 23% of the country’s GDP. The Federal spending is expected to increase further if the situation is not dealt with sooner. On the other hand, the deficits experienced in the country are as a result of the increased Federal spending which in turn leads to higher debts (Matthews & Driver, 2013). There are also programs in the country that are associated with the rising national debt since they tend to increase Federal spending. The programs taking a toll on the Federal Government include, for instance, Medicare and Social Security. These programs at the moment appear unsustainable since they take a larger part of the budget and are anticipated to cause further strain on Federal spending. As a result of the concerns raised regarding the increasing national debt, there is a need for the Government to undertake a number of key reforms that can help to mitigate the current crisis. Apart from dealing with immediate concerns, there is also need for a comprehensive reform to rectify various programs in the country that have increased Federal spending. For instance, there are suggestions that Social Security needs to be withdrawn from retirees with higher income (Matthews & Driver, 2013). Further, appropriate governance is needed from the part of the Congress and the President. In the past few years, party conflicts have interfered with the Congress’s ability to provide appropriate direction for the country. As such, it is important for the Congress to fast-track decisions necessary to undertake reforms targeting the reduction of the country’s debts. On the other hand, dealing with the rising national debt requires a reduction in Federal spending and increasing tax revenues. This would help to reduce the country’s debt relative to the GDP ratio. However, is likely that Congress may not undertake a reform process that involves raising taxes as a result of vested political interests. As such, the Government needs to focus more on fiscal responsibility that involves, for example, a commitment to raise adequate tax revenue over a long period of time. This revenue in turn can be used to finance the programs implemented by the Government (Pisano, 2012). In addition, a commitment by the Government in terms of raising funds for various programs ensures that there is less borrowing. On another note, spending is seen as the key fiscal challenging facing the country at the moment. For instance, the Federal spending has been growing since 2002 (Catherwood, 2000). In this regard, it is important for the Government to avoid reckless spending and reform entitlements necessary for future economic growth. Most of the Government spending are often paid through borrowing or raising taxes, and this causes the fiscal challenges evident in the country at the moment. While the spending can also be contributed to 2008 economic downturn, the Government’s implementation of expensive programs or services that disregards the costs involved, have also contributed to the current crisis (Pisano, 2012). Entitlements are also an impediment in dealing with the current national debt crisis. Consequently, if an appropriate action is not taken to deal with the spending on entitlements, there is a likelihood in the future that the entire tax revenue will go towards funding Social Security, Medicare, and Medicaid. As such, the Government will be forced to borrow in order to fund other programs in the country. Due to the looming crisis in the country, it is important that Congress stamp their authority in terms of controlling Federal spending. On another note, since the Federal Government owns more assets in the country that include, for example, land and building premises that are commercially viable, it is important for the Congress to privatize such assets to help reduce deficits. A focus on balancing the Federal budget and ensuring it remains as such is also necessary. This involves preparing a budget that also considers the long-term fiscals responsibility in the future (Matthews & Driver, 2013). Fig1: Lowering Federal spending Source: The Heritage Foundation, 2015 Conclusion The national debt raises concerns because; the interests paid by the Federal Government continue to increase may surpass other spending. In addition, the increasing debt is also impacting negatively on the country’s resources. The high national debt also has an impact on the economy as it lowers growth, affect employment and salaries earned by American citizens. Further, as a result of the increasing debt, the value of the dollar also diminishes and this interferes with investor confidence. As a result, they have no option but seek other alternative investment destination apart from the United States. Since early 2000, the country’s debt has been increasing rapidly, and there is a need for the Congress and the President to take immediate action to address the situation. References Barth, J.R., & Li, T. (2012).US debt and deficits: time to reverse the trend US debt and deficits: time to reverse the trend. Economic Affairs, 32(3), 97-101. Catherwood, H. R. (2000). The U.S. national debt. The Government Accountants Journal, 49(2), 66-67. Clayton, G.E. (2005).The Federal deficit and the national debt. Business Economics, 40 (1), 29- 39. Matthews, W., & Driver, R. (2013). Managing Federal debt: a two phased approach. Journal of Management Policy & Practice, 14(1), 105-111. Pisano, M. (2012).New rules and new realities: National renewal and fiscal sustainability in the twenty-first century. Civic Review, 101(1), 4-7. The Heritage Foundation. (2015). Cut Spending, Fix the Debt, and Reform Entitlements. Retrieved from http://www. opportunity.heritage.org/cut-spending-fix-the-debt-and-reform-entitlements/ Read More