America’s national debt has a significant effect on its current economic situation. Political leaders come up with political rhetoric that does not in any way inform Americans about the current debt situation (Solow 29). Foreigners own $11.7 trillion of the outstanding debt which is almost half the total amount of debt owed to the public. Such an outstanding debt is a direct burden to the American people (Solow 29). The economic effect of this debt will affect both present and future generations.
The American government has found it difficult to repay its debt in the last decade because of poor strategy and investment (Celasun 57). The government has continued to use borrowed money on tax cuts and war instead of investing in infrastructure and education. Skilled labor and infrastructure are very important factors of production which can help the government to improve its production (Celasun 58). Debt repayment becomes much easier if there is extra production.
The American government is always keen on repaying its debts because failure to do so would increase the cost of borrowing (Whalen 112).
The statutory debt limit is one of reasons that can prevent the Treasury from making debt payments on time. America has no intention of defaulting even with the current credit-rating downgrade. America owes foreign lenders in dollars and this makes repayment of loans much easier (Whalen 112). There are many ways through which America can repudiate its current debt and enhance economic growth.
The government can encourage inflation to weaken the dollar so that repayments are made at lower rates compared to borrowing. This strategy applies to both local and foreign borrowing. The inflation strategy works well for America because its borrowing and debt repayment is always done in dollars (Solow 29). It is important for the government to be very careful when using inflation as a way of repudiating its debt because of the danger of uncontrolled inflation (Solow 29).
America’s domestic debt is completely different from foreign debt. The repayment of principal and interest on bonds owned by Americans benefits the taxpayer apart from being a direct burden (Stein 84). Local banks, businesses and households lend money to the Treasury that eventually benefits the American people.
The taxpayer feels the burden of repaying foreign debts because the interests accrued from the loans can not in any way benefit the local people. Private investments decline as a result of Treasury bonds that result from domestically owned Treasury debts (Stein 84).
Private investors can not invest in corporate bonds that have higher returns because of the current debt situation. The Treasury bonds available for sale would be very few if the domestically owned Treasury debt was small. Many investors are forced to invest in Treasury bonds due to investment security reasons (Canuto 97). Although corporate bonds are more profitable than Treasury bonds, investors are forced to bear that burden because of the increasing amount of domestic debt.
Treasury bonds are very useful in times of economic recession because they become a source of extra savings for meeting the increasing demand for goods and services (Canuto 97).
Private investors can access their money to improve the production of goods and services and in the process reduce the effects of economic recession such as unemployment. It is difficult for the Treasury to embark on debt reduction during economic recession because most of its spending at that time is normally facilitated by domestic and foreign borrowing (Stein 157). It is difficult to reduce Treasury borrowing because the current economy depends on public borrowing and spending (Stein 158).
The recent market failures in America led to economic recession. In an attempt to increase their profits, banks end up taking excessive risks and giving out bad loans which are some of the major causes of a financial crisis (Whalen 77). America’s stimulus packages have completely failed to yield the expected results and in the process leading to an increase in the federal deficit and debt.
The design and execution of the stimulus package was not done in the best way possible and this made a significant contribution to the current financial crisis in the U.S (Whalen 77). Lack of proper regulations and government control is responsible for the recent market failure. The American government was forced to come up with radical changes after the 2008 election in order to control economic recession (Canuto 123).
Financial market laws determine whether the country will experience financial stability or not. The growing public debt is as a result of increased federal spending on Medicare and social security. Irrational exuberance in the housing market is another reason for the current market failures. The American government failed to monitor the prices of houses and this made investors in the housing sector to inflate house prices (Canuto 124). This led to the collapse of the housing market which is very important to the American economy.
In conclusion, the American government has a lot of work to do when it comes to reducing the negative effects of its current debt situation. The American economy depends on both domestic and foreign borrowing for its spending (Stein 156). It has been difficult for the country to repay its debt as quickly as possible because most of the borrowed money is spend on war and tax cuts (Stein 211). The failures in the financial and housing markets made a significant contribution to the recent economic recession.
Works Cited
Canuto, Otaviano. Until Death do us Part: Subnational Debt, Insolvency, and Markets. New York, NY: World Bank Publishers, 2013. Print.
Celasun, Oya. The U.S Federal Debt Outlook: Reading the Tea Leaves. New York, NY: International Monetary Fund, 2010. Print.
Stein, Jerome. Stochastic Optimal Control and the U.S Financial Debt Crisis. New York, NY: Springer, 2012. Print.
Solow, Robert. Our Debt, Ourselves. 27 Feb. 2013. Web. <https://www.nytimes.com/2013/02/28/opinion/our-debt-ourselves.html>.
Whalen, Christopher. Inflated: How Money and Debt Built the American Dream. New York, NY: John Wiley & Sons, 2010. Print.