US National Debt Crisis

From USDProjectWiki
Jump to navigation Jump to search

Introduction

The national debt level of the United States is a measure of how much the U.S. government owes its creditors. Since the government almost always spends more than it takes in, the national debt continues to rise. It has increased more than 10 percent since President Trump took office in January of 2017 with the debt-to-GDP ratio approaching 110% in 2019. Under President Obama's eight years, the national debt increased 100 percent, from $10 trillion to $20 trillion, although the economic stimulus following the 2008 financial crisis added quite a bit early on.

The Size of US National Debt

The total national debt of the USA has reached more than $22 trillion in 2019 April, which is the largest in the world and has been increasing $1 trillion each year since 2007, whereas the GDP of the country is $21 trillion. After the great financial crisis 2007-08 the US government has faced some debt crisis and making the issues more serious and controversial too. Simpson-Bowles report recommended many good ways to cut the debt. But Congress ignored to implement it and the debt continued to grow. Now concerns have arisen how long the US government can sustain the debt servicing with the tax revenue and what would happen if the interest expenses on national debt is served by money printing.

The US Debt Crisis since 2011

National debt exceeded $22 trillion on February 11, 2019. This is more than America's annual economic output as measured by its gross domestic product. The last time the debt-to-GDP ratio was more than 100 percent was in 1946 when the nation had to pay for World War II. In April 2011, Congress delayed approval of the fiscal year 2011 budget, almost causing a government shutdown. Republicans objected to the $1.3 trillion deficit, the third highest in history. To reduce the deficit, Democrats suggested a $1.7 billion cut in defense spending to coincide with the wind-down of the Iraq War. Republicans wanted $61 billion in non-defense cuts to include Obamacare. The two parties compromised on $81 billion in spending cuts, mostly from programs that hadn't used their funding.

Why does it matter?

The federal debt limit expired on March 1, 2019. Markets didn’t move and the holders of the $22 trillion in national debt didn’t utter a peep of worry that the U.S. government wouldn’t pay its interest or redeem its bonds. The government is now taking temporary measures to pay its bills—delaying intergovernmental transfers and probably looking for coins in the couch cushions. The U.S. loses its legal authority to pay out cash in fall 2019. Would Create Crisis of Confidence. When the limit is reached, the U.S. Treasury can’t borrow any more, which one would think would cause a crisis of confidence, severely impacting the real economy for fear the government would default on our debt.

May Trigger Recession?

The Federal government, Social Security, Medicare, Military and the Federal Retirement system own 27% of the debt. Social Security, Medicare, the Military and the Federal Retirement System, all government agencies, hold a surplus and invest in U.S. government bonds. Foreign governments and investors hold 30 percent of it. Individuals, banks and investors hold 15 percent. The Federal Reserve holds 12 percent. Mutual funds hold 9 percent. State and local governments own 5 percent. The rest is held by workers through pension funds, insurance companies, and savings bonds.

How it affect the Economy?

In the short run, the economy and voters benefit from deficit spending. It drives economic growth. The federal government pays for defense equipment, health care, and building construction. It contracts with private firms who then hire new employees. They spend their government-subsidized wages on gasoline, groceries, and new clothes. That boosts the economy. The same effect occurs with the employees the federal government hires directly. As part of the components of GDP, government spending takes a huge chunk, most of which is allocated to military expenditure. Over the long term, a growing federal debt is like driving with the emergency brake on. As the debt-to-GDP ratio increases, debt holders could demand larger interest payments. They want compensation for an increased risk they won't be repaid. Diminished demand for U.S. Treasurys would further increase interest rates. That would slow the economy.

Sources