Introduction
The national debt of the United States is one of the most known economic phenomena in the world. It is a regular topic in the elections agenda, it is a common cause of fear among economists, and it is also an extremely contradictory financial issue. The US national debt is both an alarming and stabilizing factor. It manages to be a source of threat and a sign of stability at the same time. Understanding what makes the national debt of the United States so controversial is essential in ascertaining its relation to macroeconomics.
National Debt within the Context of Macroeconomics
Before delving into the specifics of the US financial policy, it is important to know how much influence the debt can exert on the economy. When economists talk about macroeconomics, they refer to the variety of factors influencing the performance of the entire economy (MĂĽgge, 2016). It should be noted that the scope of this field is such broad that it does not incorporate economic issues exclusively. Decision-making on the governmental level is done based on a combination of factors. Naturally, some of them include macroeconomic indicators, such as gross domestic product, unemployment rate, inflation, and other statistical data concerning the state of the economy.
However, there are also a plethora of other spheres, which are not economic but nonetheless important. Political affairs, social issues, international relations are all considered when the authorities decide their next steps. They become especially relevant when decision-making concerns countries’ debts. The reason for this is that once the budget deficit is no longer viewed through the prism of numbers, it becomes a political issue. (Slater, 2018). Faced with the problem of the lack of resources, the government is forced to ask other states for loans. This decision temporarily solves the financial deficit, but it also backfires in a negative way.
The most vital form of power any country has is its sovereignty. As long as the government is free to make its own decisions without relying on other states or organizations, the nation remains independent. Yet, if a country becomes indebted to another state, its sovereignty is compromised. This is the real danger of using the national debt as a solution to the lack of money – the government no longer decides how it spends its resources on its own (Slater, 2018). Any indebted country also gives its loaners leverage points in negotiations. Therefore, national debt seizes to be a purely economic phenomenon and begins to influence macroeconomics politically.
The Uniqueness of the US National Debt
Overall, it is expected that a country with debts has severe problems with its sovereignty and authority in the international arena. Yet, this is not the case with the United States. America has an unprecedented level of national debt – over 27 billion dollars (US debt clock, n.d.). At the same time, it is the leading nation of the Group of Seven, Group of Twenty, Organization for Economic Cooperation and Development, and the world’s largest economy by nominal GDP (The World Bank, n.d.). This raises the question of how a single entity can have the world’s biggest debt and be a hegemon simultaneously.
First, the problem of the US national debt is not new. The United States has had a budget deficit since Ronald Reagan’s presidency, which makes more than forty years (Furman & Summers, 2019). Within this time frame, generations have grown in a country that lives in constant debt. Furthermore, not only did the debt not subside, but it has also been growing exponentially. Yet, the US continues to spend extraordinary resources on all spheres of life, ranging from military defense to social policies. The subsequent implication is that the national debt does not necessarily incapacitate the government.
In order to understand how the United States manages to continuously increase its debt without any apparent repercussions, it is necessary to realize how money is created. Every country has a superior institution responsible for the printing of its national currency – a central bank. In the case of the US, this role is executed by the Federal Reserve. Money is the financial equivalent of goods and services (Focardi, 2018). The excessive number of commodities not backed by the sufficient amount of financial resources in the economy overvalues money. The reverse is also true – if there is too much of it, money is devalued, which leads to inflation.
Implications of the National Debt
In general, inflation manifests in the rise of prices, while population incomes remain the same. However, in the case of the US, this is not such an urgent problem (Furman & Summers, 2019). Inflation is controlled, while it should have skyrocketed long ago, like in Spain, Greece, and other economies with substantial national debts (Conerly, 2020). There conventional solution to inflation is cutting expenses and raising taxes. This is a dangerous policy because the population will immediately feel the consequences of the budget deficit and may start rioting. It is also not the decision the US Government chooses because its citizens are too attached to complex social programs such as Medicaid and Medicare.
The US response is different – it uses the position of the dollar as the world’s reserve currency. First, many countries are poorer than the United States, which makes their currencies cheaper compared to dollar. A special quality that the US dollar has is that it is a trustworthy investment – those who loan money to the US will always receive interest. However, these countries are not actually buying dollars – they are purchasing the American promise to pay back the debt (Furman & Summers, 2019). These financial obligations are called US bonds, which are issued by the US Department of Treasuries.
In essence, America loans money into existence because it does not exist on paper but in the form of interest and debt. This way, the Federal Reserve creates new money and deposits them in the American banks. However, the US has to export dollars to prevent inflation (Furman & Summers, 2019). One way of ensuring this is moving the production from the Unites States territory to poorer countries. Another method is lending financial assistance to governments which have suffered from war, poverty, or social strife. As a result, the US dollar bubble will continue to increase as long as the dollar remains in demand and is exported out of the US.
Conclusion
Altogether, it should be evident that common macroeconomic rules do not always apply to the United States. It has the largest national debt in the world, yet the economy continues to grow, and the government expenditures increase. The reason for the apparent American invulnerability lies in the dollar, which is created by the continuous cycle of loans. The American currency is exported into other economies, which prevents inflation in the United States. The growing bubble may constitute a future threat, yet it has provided the US with growth for over forty years. Overall, the demand for the dollar explains the growth of the United States national debt and its unique macroeconomics.
References
Conerly, B. (2020). Federal debt a danger to business, but not this year. Forbes. Web.
Focardi, M. F. (2018). Money: What it is, how it’s created, who gets it, and why it matters. Routledge.
Furman, J., & Summers, L. H. (2019). Who’s afraid of budget deficits: How Washington should end its debt obsession. Foreign Affairs, 98, 82.
MĂĽgge, D. (2016). Studying macroeconomic indicators as powerful ideas. Journal of European Public Policy, 23(3), 410-427. Web.
Slater, M. (2018). The national debt: A short history. Oxford University Press.
US debt clock. (n.d.). Web.
The World Bank (n.d.). GDP (current US$). Web.