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The United States of America started having debts during the American Revolutionary War (Mauro 1). Debts pile up whenever the U.S. engages sovereign states in a military conflict because the government needs more funds to finance the war effort (Mauro 1). The country incurred more debts in the aftermath of the Vietnam War and the Iraq War. It is imperative to point out that loans were made not only to pay for the foreign countries’ invasion, but debts are also incurred in the aftermath of financial difficulty when state expenditures are higher than the country’s earning capability. The United States had to spend more to counteract the Great Depression (Davidson 1). However, the state breached the “debt crisis” level in the aftermath of the 2008 financial meltdown. It is essential to develop effective strategies to help manage America’s debt woes to prevent a downward spiral that leads to a full-blown debt crisis.
Why Label it a Crisis?
To understand the nation’s financial problems, it is best to illustrate the story with concepts and ideas that a significant number of people can comprehend even if they do not possess a degree in economics. One way to demonstrate the seriousness of the problem is to borrow a medical narrative of a dreaded medical condition known as HIV/AIDS. When a person is infected with the HIV, it is understandable if the affected person labels it a health crisis because there is no known cure for the disease called Acquired Immunodeficiency Syndrome or AIDS. To have AIDS, one has to be infected by HIV. However, the downward spiral from HIV infection to full-blown AIDS takes a long time to manifest. This assertion is true for those who had access to drugs to mitigate the impact of the virus.
The same thing can be said of America’s debt crisis because the failure to implement effective strategies geared towards the reduction of the national debt leads to a full-blown crisis. When the problem reaches the desperation point, lenders become wary of America’s capability to pay its debts (Amadeo 1). Thus, the first significant sign of extraordinary financial trouble becomes obvious when lenders are no longer open to the idea of allowing the U.S. government to borrow money with a lower interest rate. In this scenario, the U.S. government defaults on its loans and ignites a chain-reaction of events that causes the breakdown of government services, unprecedented unemployment rates, and investors pulling out money and redirecting the funds outside the United States (Wegmann 1).
The Consequences of a Full-Blown Debt Crisis
Labeling the problem as a “debt crisis” is a justifiable exaggeration. It is not yet a full-blown crisis. However, there is a need to act with the utmost urgency in order to prevent dire consequence that is so terrible to contemplate. The issue grabbed headlines in the year 2016 because, for the first time in U.S. history, the nation’s debt exceeded the $19 trillion mark (Amadeo 1). In order to get a better perspective on this problem, consider the fact that this amount is more than the annual income of the United States when measured using the Gross Domestic Product framework. In fact, the last time the debt load was higher than the country’s annual income occurred in 1945 when the government paid for the expenses required to fight Nazi Germany in World War II (Amadeo 1).
It is also a sobering thought to realize that two-thirds of America’s debt is comprised of public debt through the sale of Treasury Bonds (Davidson 1). One-third of the debt comes from government institutions. Furthermore, a massive chunk of the loans came from intergovernmental debts linked to Social Security and trust fund investments. In other words, people are investing in the U.S. government due to the assurance that when it is time to collect the debts, the government assured them to pay the amount it owes to the investors plus interest.
The American Federal government currently owes a great deal of money to investors buying up U.S. Treasury bonds. Savvy investors are looking for tell-tale signs of insolvency. When lenders increase the interest rates for loans made to the United States, these investors start to fidget in their seats. As of 2013, China amassed large amounts of U.S. Treasury securities valued at $1.28 trillion (Morrison and Labonte 1). One way to appreciate this figure is to think about the consequences if Chinese investors decided to sell the said securities and reduce the perceived value of U.S. securities in the world market (Morrison and Labonte 2). It is detrimental to the U.S. economy in the long run if investors are no longer willing to infuse much-needed cash flow to the national economy.
The loss of investor confidence means that they are no longer comfortable in buying large chunks of U.S. Treasury Bonds. This pattern of behavior reduces the capability of the U.S. government to access funds and triggers the need for more borrowing. In the end, America ends up incurring more debts with higher interest rates. When the U.S. defaults on its loans, cash flow halts abruptly, and the federal government can no longer function cost-efficiently. Anarchy and economic turmoil are expected outcomes.
Not all the buyers of U.S. Treasury Bonds are savvy investors with multi-million dollar properties and lucrative investments in other countries. A full-blown debt crisis is going to affect ordinary American citizens, especially those that are dependent on America’s Social Security system. In a blink of an eye, retirement funds are going to dry up, followed by the collapse of the stock market.
Solving the Riddle
It is not going to be an easy task to reduce the current fiscal deficit. It is a tremendous challenge to reduce the government’s funding on essential services and the maintenance of critical infrastructures when the needs of the citizens call for higher spending and not drastic cuts in government expenditures. The problem is so complicated that some financial experts are using the easy way out in order to calm the nerves of nervous investors. They are saying that even if U.S. loans far exceed the country’s GDP, more and more people are buying U.S. Treasury Bonds. This is a testament to the fact that investors find America as a safe place to invest when viewed from the perspective of unstable economies outside the borders of the U.S.A. In other words, the status of the U.S. economy as one of the strongest on the planet attracts a lot of investors, even as the nation comes face-to-face with a severe debt problem. Nevertheless, it is not prudent to continue spending money that the economy cannot pay back on its own earnings.
In order to solve the riddle of the U.S. debt crisis, it is imperative to incorporate two critical insights into the root cause of the $19 trillion debt. Financial experts are in agreement that tax cuts and the 2008 financial crisis were two significant contributors to the country’s current debt woes. Thus, it is essential to find ways of increasing the government’s revenue collection capability. Tax cuts are not inherently evil, but the ineffective and misguided use of tax cuts makes it impossible to eradicate the financial hole the country finds itself right now. In addition, the United States cannot afford another legal loophole that allowed unscrupulous businessmen and bankers to exploit a flawed system that caused the 2008 financial crisis. For example, the 2008 financial crisis was the direct result of the U.S. sub-prime mortgage crisis that was in retrospect fueled by a flawed system that allowed people to borrow money even if they did not have the capability to pay back the money they borrowed from lenders (Morrison and Labonte 10).
It is not enough to make commitments linked to income-generating schemes and government savings. It is also of great importance to change the mindset of government officials and policymakers from trying to survive and hold to their jobs and evolve into a state-of-mind geared towards accountability and sustainability. David Perdue was a Fortune 500 CEO credited for helping the cash-strapped Reebok shoemaker brand to return to a state of profitability after years of financial insolvency. It is prudent to listen to Perdue’s advice because he is now a U.S. senator. In other words, he had access to two different worlds. In one interview, Perdue stated that solving the U.S. government financial problem is not an impossible task.
Perdue pointed out that the Federal Government operates using $3 trillion dollars, and for the sake of comparison, he said that Walmart operates using half that amount ( Perdue went on to say that Walmart executives are able to manage that amount and the company runs on a surplus. Nevertheless, Perdue warned that the corporate world is more results-oriented compared to the U.S. government, which is process-oriented (Wegmann 1). In other words, the government officials and policymakers do not have the same drive, incentive, initiative, and sense of urgency frequent in most business boardrooms to reverse the current financial problem in the near future. Consider, for instance, the current policies that govern the implementation of cash outlay related to Social Security, Medicare, and Medicaid. As of 2012, there were no policy changes that were made to improve cost efficiency with regards to Medicare or Medicaid (Wallison 73).
In the present time, America is not yet faced with a full-blown debt crisis. Nevertheless, it does not make sense to continually manage and operate a government framework using borrowed funds. It is imperative to generate income and reduce unnecessary expenditures, such as the use of tax payer’s money to mitigate the impact of the 2008 financial crisis. It is also critical for government officials and policymakers to develop a sense of urgency, accountability, and initiative to solve this problem before time runs out.
Amadeo, Kimberly. “The U.S. Debt and How It Got So Big.” The Balance. 2016, Web.
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Davidson, Jacob. “How Much Does America’s Huge National Debt Actually Matter.” Time. 2016, Web.
Mauro, Paolo. “Debt Dangers.” U.S. News, 2016, Web.
Morrison, Wayne, and Marc Labonte. “China’s Holdings of U.S. Securities: Implications for the U.S. Economy.” Congressional Research Service 7.5700 (2013): 1-19. Print.
Wallison, Peter. “How and Why a U.S. Sovereign Debt Crisis Could Occur.” Econ Journal Watch 9.1 (2012): 71-77. Print.
Wegmann, Philip. “David Perdue, CEO Turned Senator, Warns of America’s Coming Debt Crisis.” The Daily Signal, 2016, Web.