National Debt: It is Not Just a Number, It is Our Future Miranda Rosenbaum Macroeconomics Professor C. Simkonis April 29, 2008 Rosenbaum 1 As a nation, America has accumulated a tremendous amount of debt which will affect not only the lives of the current citizens, but generations thereafter. Currently, the United States public debt is approximately $9. 5 trillion, in long form, that’s $9,500,000,000,000. This ridiculous amount of money is a historical accumulation of misappropriated surpluses and exacerbated deficits.
It is important for American citizens to not only understand the national debt concept, but also understand the causes and effects that lead to this point and what action we as Americans must prepare to do in order to significantly reduce this outrageous mistake. In order to understand the concept of national debt, it is important to know exactly where the money is derived. The funds owed by the United States federal government are either private (external) or public funds.
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If the funds are private, they are owed to foreigners in the form of securities such as Treasury Bills, Notes, Bonds, TIPS, Savings Bonds, and the State and Local Government Series securities. If the funds are owed by the public that means that large American corporations have purchased these securities and therefore America owes these corporations that amount plus interest. In addition to securities and bonds, the US federal government receives income through taxes. The Internal Revenue Service manages the financial portion the government receives from citizens and helps determine the surplus/deficit budget.
These funds are used to improve homeland security, Medicare/Medicaid, Welfare programs, and Unemployment issues among other Rosenbaum 2 government programs. When the expenses of the US Government exceed the revenue collected, it issues new debt to cover the deficit. This debt normally takes the form of new issues of government bonds which are sold on the open market. Another option is to allow the Federal Reserve to monetize money which ultimately dilutes the value of dollars already in circulation, resulting in a weak dollar and inflation.
However, during the 1980’s President Ronald Reagan drastically reduced taxes and therefore severely increased the national debt because less money was available to these programs. Then, President George W. Bush was elected and demanded a tax relief to many Americans. This would have helped stimulate the economy if more than half the funds were not given to the upper class which has the tendency to not spend but save according to the marginal propensity to consume/save.
If the funds were given only to the citizens of the lower rungs of the socioeconomic scale, they would have spent more money, saved less, and stimulated the economy. As a result of reduced taxes and a misappropriated tax stimulus, our United States government was forced to increase the national debt by borrowing more money from foreigners. This resulted in the highest debt in the history of the United States and a very hefty IOU. Also, the economy can not afford a reduction in assistance of government programs, so this is clearly not an option at this point.
Therefore, the only option is to continue to borrow, even if we do not have the financial power to repay our debtors. Rosenbaum 3 Consequently, political jargon and miscommunication has caused the common American to not realize the severe impact of national debt on our everyday lives. The national debt has caused a ripple effect to blast through our economy with absolutely no end in sight. To begin, as the government increases its borrowing, it also decreases its ability to loan money to large corporations due to a rising interest rate.
This has caused our economy to turn from a manufacturing economy to a service economy. Many believe this is an increase in quality of life because employees are not working in factories or mills as much, but in reality, the factories and mills paid far more than the service industry that we have now. Less wages results in less spending and significantly slows the economy. Furthermore, companies such as General Motors began to invest in more service industry sectors such as banks and sales rather than manufacturing.
The demand for service remained the same because the population did not change drastically, but the supply of service employees increased, thus driving wages ridiculously low. Also, many people have been laid off of their manufacturing job and depend on government programs such as Welfare and Unemployment to provide food and shelter for their families. This has caused the government to increase spending by using an expansionary approach and once again increase borrowing to fuel these programs. Even worse, the cycle does not stop there.
Our government is currently servicing the debt by borrowing additional funds from Rosenbaum 4 foreigners just to pay interest on the current debt. On average, its approximately $1. 4 billion in interest per day! According to Bradley Schiller, a United States economist, when the Euro was first implemented by the United Nations in European countries, the dollar bill was worth approximately 1. 10 Euros. But with the increase in national debt and monetizing, inflation has caused the dollar to plummet to a measly . 64 Euros.
That’s almost half of what it was worth before! A normal European hotel room could dent an American pocket as much as $600, even though it is only worth about $400. What do can Americans do to cease this awful cycle? To begin, they must prepare themselves for an extreme recession. The recession will not only be caused by the worth of the dollar bill, but also the much needed increase in taxes. The taxes will allow the government to stop servicing the debt by only paying the interest and begin applying funds to the principal.
President Bill Clinton did this in the early 1990’s even though America was against it and the economy experienced some of the best economic times in the last five decades. The worth of the dollar bill will increase and the mortgage rates will begin to stabilize. As a whole, the economy will initially experience severe slump but it will climb its way back to stability. Since the money supply is reduced when the U. S. Government pays down the debt, the unintended result of a government surplus could be a deflationary recession. The government can avoid this by consequence by instead focusing
Rosenbaum 5 on expanding its Gross Domestic Product, GDP, and thereby reducing the percentage of GDP that debt can represents. Some argue to increase government spending through the use of stimulus plans which will allow consumers to spend money and increase the economy. However, those who argue that an expansion of the money supply is necessary to expand the economy need to explain the colossal failure of Japan’s Central Bank. In last attempt to follow Keynesian economics and spend itself out of a recession, Japan’s central bank engaged in no fewer than ten stimulus programs over the 1990’s.
This however did not solve the economic problem and instead left a huge debt looming over Japan’s government. The national debt is certainly one of the top five problems facing the United States if not the top problem. If we continue to borrow from foreigners and continue to spend beyond our economic capabilities, the dollar bill will continue to fall and our economy may fall into a depression. This may sound like a true slippery-slope, but with today’s economy and the increase in gas prices (mainly caused by the falling dollar); it is certainly not out of the question.
Americans must prepare for the worst and even more importantly, understand not only the causes but also the effects of national debt. This will empower each and every citizen to make knowledgeable decisions and one-by-one we will overcome this obstacle as we have many others throughout our past. Works Cited US National Debt Clock http://brillig. com/debt_clock/ Schedules of Federal Debt http://zfacts. com/p/461. html United States Treasury http://www. ustreas. gov/education/faq/markets/national-debt. shtml