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Americas Debt and Budget Deficit

American’s debt

Introduction

The American debt and budget deficit problems have been on the increase for several years now. In 1992, the national debt stood at $4 trillion, which represented a 64% of the annual Gross Domestic Product. Over the next eight years, the debt was managed and reduced to 56% of the budget. However, it has swollen since then. The current American debt as at today stands at 14,350,296,997,143, which is slightly above 100% of the annual Gross Domestic Product. America has an estimated population of 310,677, 986 which means that every citizen in America shares $ 46,190.17 of the public debt. The means that the national debt continues to grow averagely at $ 3.98 billions per day since 2007.

It is predicted that the deficit will continue to grow over the next few years with estimates being $50 trillion by 2030. This represents 140% of the Annual Gross Domestic Product. As the debt ratios continue to rise, the creditors will continue demanding higher interests rates to finance the debt. This, in turn, means that the deficit will continue to get larger and larger, which will force the United States to default its payment. In the light of these facts, I hold that America’s debt is growing to be unmanageable and that it is unsustainable.

Analysis

Causes of the increase in the American’s debt.

To be able to understand what causes the uprising American debt, it is important to understand what the composition of the debt. The national debt is the amount of money the federal government owes to the public and other agencies. The federal deficit can also be used to explain the national debt, where the expenditure of the states exceeds the revenues. The national comprises of all the debts throughout the history of America plus the interests due from such debts. The state owes the Federal Reserve about forty percent of the total debt, while the remaining amount is owed to individuals, corporations and foreign governments. This situation is deteriorating by day as the crisis facing the world markets today demand more future borrowing; this means that the debt will continue to grow at a greater rate than the economy (Fink & High 18).

Knowledge and awareness of the national debt and budget deficit is very crucial for various reasons. One, the national debt is very expensive; the cost of borrowing of these funds is very high. Currently America appends over 900 billion each year in interest payment alone. Secondly, the big national debts cripple the development of the economy. The money given by the public as a loan to finance public social programs would have been used in most productive economic activities. Thirdly, increasing debts means that the government is relying heavily on foreign debts in paying its bills. The gives the individual foreign countries like China and Japan leverage in negotiations with America.

Such leverage maybe harmful to the strategic and competitive interests of America.  Fourthly, the over-reliance on public debt sends signals to market that America has become a risky borrower. This way, the buyers of the bonds will start demanding greater interest rates, to compensate them, in the event that the principal loan is not paid. The other concern facing increased national debt is inflation. For the government to manage the debt, it may cut on expenditure of increase or apply both mechanisms (Konigsberg 94). These policies are not very popular, and the government may result in monetising the debt. The government prints new money to repay the debt. This will result in high levels of inflations, which will affect the value of the dollar.

America has had debts since its inception. These debts have continued to accumulate making it so large today. Over the years that American government cut down on taxes and increased its public spending resulting to a more increase in the public debts. The economy and the holders of the debt benefit in the short term. The holders enjoy high interest rates to compensate the risks that they will not be paid in the long run. The economy, on the other hand, benefits in the sense that there are funds available for spending. However, this loan and the interest rates on the loans becomes a burden as the government will have to repay the debt eventually (Harrison & Dye 101).

One of the causes of the increasing debt levels is through budget deficits. This happens when the government exceeds expenses over the revenues it collects from taxes and other revenues over a one year period of time. Each annual deficit is added back to the accumulated debts. When this happens, the government issues debt to cover up the difference. The debt comes in the form of bonds where individuals, corporations and the Federal Reserve buy. The government also loans itself some money through The Social Security Trust Fund. The result of this is increasing the national debt levels.

The second cause of increase in the national debt is the increased government expenditure in social programs. This represents the amount of money the government puts aside for public expenditure. This spending is financed either by taxation or by borrowing. CBO projects that public expenditure will double in the next few years to account for over 40% of the GDP. This means that the government will require additional funds. More funds can only be made available through increased taxation or borrowing. This will cripple the American economy and destroy its international competitiveness.

The other cause of the increasing debt in America is the Afghan and the Iraq wars. The two wars are estimated to cost the government $ 2.4 to $ 3.5 trillion. The CBO estimates that the war will cost $ 2.4 trillion by the time the war is expected to end by 2017. The democrats on the JEC (Joint Economic Committee) estimate that the war will cost 3.5 billion. This has a very great impact on the national debt. There is no doubt that the war increased the national debt substantially. For the first time, United States cut taxes as it started this war. This meant that the war was fully funded through borrowing.

The government has been issuing bonds to be able to finance the war. It has also issued credit cards to China and other foreign buyers to be able to finance the costs of the war. The US debt increased from 6.4 trillion in 2003 to 10 trillion in 2008; a quarter of which is directly attributable to the war. This is exclusive of the future health costs for the disabled veterans of the war, which is likely to add an extra half a trillion to the debt. This is accompanied by very high interest rates; the interest factor comprises of almost 70% of the total amounts borrowed by the government, which continues to increase the national debt immensely. This makes the levels of the debt to be unmanageable and unsustainable. More debts continue to accumulate on every citizen without clear ways on how the debts will be paid. Critics of the war argue that the costs amounting from the war will continue to be passed on the coming generations, who had little to do with the start of the war. However, they have to pay for the debts borrowed today (Bardes 87).

The other cause of the ever increasing national debt is the increased expenditure on healthcare, especially Medicaid and Medicare. Medicare is an insurance program for the elderly people aged from 65 years old. Taxpayers cover this insurance, which is usually branded as the health insurance for the poor. Medicare and Medicaid take up to 19% of the federal budget. The government also subsidises the costs of efficient and effective medicines to make them affordable to the poor. The effect of these policies is that they encourage early retirement and fewer saving on medical expenses. In addition, it encourages the over-utilisation of the health facilities. The extra demand resulting from this insurance forces the government to dedicate more resources to the health care. This has resulted in increased costs of healthcare. In the face of increased economic hardships, the government seeks foreign funds to take care of the health care. This, in turn, continues to swell the national debt to unmanageable levels.

Solutions

To be able to control the rise in the national debt and budget deficit, the government will have to increase the taxation levels or reduce on public expenditure. As the national debts increases, so does the interest rates payable on these loans. To be able to pay these interest rates, the government and the policy makers will have to increase the amount of taxes charged on people’s incomes. The extra revenues from the taxes would be used to repay the interests rates. However, economists argue that this is not a good way of managing the debts. This is because as more taxes are charged, people get discouraged to work and save resulting in decreased incomes and output. This will make the situation worse. This is also opposed by the politicians, who fight for the rights of the citizens.

To avoid the taxation problem, the government can embark on disinvestment policy, which entails reducing on its public spending, this way; the savings from the reduced funding will be used to pay the debts. This will entail some sacrifices by citizens so that in the future, the debt will be lower. The Keynesian economists hold that this is not a very good for the economy. This is because, when the government reduces spending, so does investments and consumption. This can only be applicable when the economy is near full employment. However, the current expenditure is greater than amounts necessary to maintain and support equitable citizens and an efficient financial system. The government should, therefore, cut on the current expenditure to repay the public debt and avoid it from increasing above the already high limits (Miron 78).

The other solution to the national debt problem would be establishing a consolidated sinking fund, basically meant to repay the debts. This fund will enable the government to repay the debts instead of issuing new bonds to repay the existing debts. Normally, governments take up debts to repay the due loans. This means that there is a continuous vicious cycle where a debt is repaid using another debt, which means that in, essence, the debt was never paid. The consolidated fund will help to break this vicious cycle.

Conclusion

The American debt has been increasing at an alarming rate in the last one decade. There are reasons why the amounts of the debt are going up so fast. First, the ongoing Iraq and Afghan wars are costing the government a lot of money, and thus the government is forced to take more debts to be able to finance the costs. An increase in public spending is another cause for increased debts and budget deficits. The spending is projected to double in the near future. However, these services do not bring in revenues, and so the government have to seek other sources of finance to finance the debt. The government can raise funds through taxation or through borrowing. Since taxation is not popular with both the politicians and voters, then form of raising funds left is through borrowing, this continues to swell the national debts beyond manageable and sustainable levels (Baumol & Blinder 64).

The national debts and deficits have very great impacts on the economy of the United States of America. In the short run, the debts results in increased economic growth especially during recessions. Despite this, the long run effects of the debts are quite destructive to the economy. One of the harmful effects is the higher interests to be paid for such loans. This will reduce the amount of money available for the government to invest. Secondly, the American government may fall into the temptation of allowing the dollar value to fall, so it will be cheaper to pay the debts. In this case, foreign investors become reluctant in purchasing the US bonds pushing the interest rates much higher.

Quick measures need to be taken to manage the current national debt and budget deficit conditions. However, any abrupt stop borrowing will push the value of the dollar down, push interest rates and inflation up, which would have a more harsh impact on the economy of America and the world at large. For this reason, the government needs to take swift measures to be able to manage the situation. First, the government can increase taxation levels on individuals and corporations. This will avail more revenues to repay the debt. Moreover, the government can cut on its public spending, so that the saved amounts of money can be used to repay the debt. The last option would be establishing a consolidated sinking fund, which will help to break the vicious cycle of borrowing. These measures will help to improve and reduce the national debt levels into manageable and sustainable levels.



Jun 19 2012 , 12:20
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