This post was written on December 13, 2014. Therefore, some of the details within might be dated. For one, the national debt has topped $20 trillion a few days ago…and outweighs our total economic output. However, the overall issue contained within, as well as the conclusion, are still just as relevant.
You’ve probably heard that within the last week or so, the United States has now attained a national debt level of over $18 trillion. The national debt (also referred to as “public debt” or “government debt”) involves deficits owed by the central government of a country or state (In the U.S., as with other federal countries, that includes the debts of the states, municipalities, and local governments) which come usually through borrowing based on issuing securities, government bonds, and bills. Since the government derives it’s income from the population (or at least some of it), the national debt is an indirect debt of taxpayers.
The United States is 6th in the world when it comes to the ratio of it’s public debt in relation to it’s GDP (about 102%; Japan has the highest ratio at about 228%), but does in fact have the largest debt burden of any nation just as a product of the size of it’s economy. Most of the debt held by the United States is domestic, with about 34% being held by foreign nations. China holds the largest share of our debt of any individual nation, with Japan being second. From 1974 to today, the debt has had double-digit expansions in three decades since. In fact, we have been in the red in all but 4 of the past 40 years.
What led to this outcome? One possible cause could be the decision by President Nixon in 1971 to take the American dollar off the gold standard, creating a “fiat” currency with no precious metal backing it up. This had the impact of expanding the abilities of the American monetary system to grow in various ways, but also had the unfortunate side-effect of also removing any balance in the system which keep the printing system in check. Without the gold, the only thing to back up the currency, as with other fiat currencies, is the full faith and credit of the nation itself. With no balanced budget requirement, as well as no stopgap, government officials of any origin was free to overspend as long as they could get their get their bills through Congress. Fiscal and monetary drags through politics and the Federal Reserve have also not helped the situation, and though yearly deficit levels have lessened of late, the government is still adding about a little over half-trillion dollars to the national debt every year.
Is debt inherently bad? Not necessarily. In a vibrant economy, it is in fact vital. The reason for this is because most individuals, and organizations, can’t afford to pay straight cash to purchase high-ticket items such as a house, car, or certain programs. Without ability to borrow money, the economy would halt in growth quite quickly. However, such debt intake is balanced according to moderation. As long as it is sustainable, an individual or nation won’t be swamped with the threat of bankruptcy (though a nation like the U.S. can’t technically go bankrupt since it can “produce” it’s own money…though there is a consequence for that activity). It is when that is ignored that an individual or nation can suffer a “debt spiral”, which can be exacerbated thanks to higher interest rates and payments on the debt. A nation’s global perception can be damaged if the trust in a nation’s ability to pay it’s bills becomes lessened due to continued haphazard financial policies. Indeed our nation hasn’t come to the that scenario quite yet, but it truly is just a circumstance of a matter of time until those problems present themselves. Entitlement payments as a share of the budget are growing significantly. The United States, when accounting for all the eventual payments for Social Security, Medicare, Medicaid, and other obligations, has unpaid liabilities of well over $100 trillion. Former Federal Reserve officials expect debt accumulation to eventually pick up once again within the next decade as these payments grow, assuming nothing changes. There have already been attempts by other nations, including China, in recent years to push for a new reserve currency outside of the dollar. Standard & Poor’s, one of the major credit rating agencies around the world, recently downgraded the U.S. rating to AA, the first time in several decades that the U.S. had been downgraded. And as a previous post of mine made clear, though there are other concepts that show there is more to the story, China has surpassed the U.S. in certain economic mechanizations.
All of this demonstrates that we stand at a crucial branch point with dealing with our fiscal house. The hardships in Europe and elsewhere have granted us a valuable reprieve to putting things in order so that the American dream can still be available to future generations. If we don’t take advantage, that might not be a guarantee. Many claim that such an issue couldn’t happen here because “this is America”…but history is full of nations and organizations that used similar reasoning when met with serious circumstances. They aren’t here…or at least, not with the glory they used to have. Something is what it is…until it isn’t.