Since the economic downfall in 2007-2008, the entire world has been grappling with the tough economic challenges that became the aftermath of the meltdown. The United States has also suffered from these effects and until today the government is still recovering from the impacts of the crisis. The challenge is not unique to the United States only but the entire globe is affected. The economic problems accrued had a seemingly lasting implication on the economy of the country. This paper seeks to identify and describe the debt financing economic challenges that the United States of America has been experiencing as a result of the economically tough times.
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From the past few decades, the US has borrowed a sum amounting to trillions of dollars and a higher percentage of this amount has been lent from foreign investors. Although the government has been criticized for these moves, the intention was very genuine and economically justifiable. The decision was influenced and informed by the growing need for the government to reissue its dwindling financial system as well as promote and improve its growth. It was done in the process that was very popular among the citizens of America, namely the Fiscal Stimulus Plan. Nonetheless, the country had a limitation when it came to borrowing as it was bound by the statute (Bittle & Johnson, 2008). The borrowing capacity of the United States was limited.
There is a practice that has always been active. In particular, the congress raises the debt ceiling whenever the need arises. In the current fiscal year, economists and financial experts are warning dire consequences if the government does not raise its debt limit. A serious financial crisis is being predicated among experts in finance and economics. Borrowing is an option exploited by the government whenever an extraordinary measure needs to be taken for the government to be in a position to meet its financial obligations. Mixed reactions in response to the expansion of the national debt ceiling have erupted with a greater percentage supporting the move.
Economists argue that increasing the debt limit does not necessarily cause or influence a huge national financial commitment. On the contrary, increasing the debt ceiling helps the government be in a position to meet its constitutional mandates. Through borrowing the government can fund obligations that are assigned to it by the constitution. However, raising the debt ceiling over time has been the main reason causing the government debt financing challenges. This has been the major problem that the government has been financially struggling with.
It should be mentioned that debt financing challenges in the United States of America have been greatly fueled by the shift in saving and the increase in purchasing. An economy that experiences more purchases compared to the savings is destined for crucial financial consequences. With the increasing debt ceiling, investments in capital goods like factories have been on the downward trend. This has resulted in very low output and as a consequence low income. As mentioned earlier, savings decreased significantly after the meltdown in 2007-2008 after the government increased its debt ceiling. This has caused the raising of the interest costs hence discouraging and demoralizing employees as well as led to low output and poor returns.
There is no doubt that the rising interest costs had its dire implications on the government’s financing capabilities. The economic challenges were also a result of the limitations of the legislatures to react in response to a sudden fiscal crisis through the fiscal policy (Ferguson, 2009). The debt level affects the growth rate. However, other people feel that the lack of growth in the economy is the main reason why the national debt goes high. The rising concerns over the ability of the United States of America to have enough money to finance its debts have taken the course.
The increasing debt level in the US is feared to raise the rate of inflation casing financial constraints even on the government. High rates of inflation are a threat to the well being and growth of an economy. This is caused by several factors, which have been evident in the considered situation. The rising wages have been a major challenge in the country and this has been directly influenced by the rate of inflation. The latter compromises the level of debt payment by increasing the amount paid to be higher than the amount that was initially borrowed. This puts a strain on government debt financing.
Over time, as the government’s debt increases, the foreign investors trading with the United States may take advantage and charge higher rates on their loans. Economically, higher debts levels always attract higher interest payments. This is how the higher cost is created for future taxpayers who will have to pay more than was borrowed by their predecessors. This has been the main reason causing the government to get into unimaginable financial difficulties. The huge financial debt has also been on a stalemate causing the government financial stress due to poor planning. The past generations’ borrowings were not used in a way to create more capital investment that would be creating income to facilitate the payment of the debt.
Another great challenge that the government faces is the lack of jobs for the youth. Due to the high-interest rates, there have been little or no investments, which has reduced savings while encouraging spending. Ultimately, the ability to create jobs has decreased greatly. This is deemed to cause more economic ‘tragedies’ shortly. Without investment and high levels of output, the government could face a problem because its operations are threatened (Horney, 2010). In other words, the government needs to spend its resources while at the same time creating more resources to avoid a financial default.
This paper has critically described the financial situation in the United States of America. This research aimed to identify various economic challenges that are influencing and hampering the country’s ability to finance its debt. Also, the financial crisis that covers the American financial system has been discussed together with an explanation of the event that has led to the crisis. The impacts of increasing the debt ceiling have been critically reviewed and discussed in this paper. According to this research, economists’ opinions are divided on the issue of the implications of having the dent ceiling increased by congress. Some considered that this would create an unnecessary burden to the taxpayers while others argued that it was essential for the government operations to function successfully and its goals are achieved.
Bittle, S., & Johnson, J. (2008). Where Does the Money Go? New York, NY: Collins.
Ferguson, Niall (2009). Interview with Charlie Rose. Web.
Horney, J. R. (2010). Recommendation that president’s fiscal commission focus on gross debt is misguided. Center on Budget and Policy Priorities. Web.