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How The U.S. Debt Will Affect YOU



September 8th, 2013 by in Finance with 326 Views

Credit and debt has been the basis of trade for more than 5,000 years ago, even before the advent of money. Congress was given the power to borrow money on the credit of the country. This power has been used since 1791 and since then only one time did the federal government had no debt, and that is in the year 1836.

The U.S level of debt rises and falls depending if there is annual budget surplus or deficit. Generally, the U.S. has experienced increase in debt since 1974. Some analysts say the debt is a ticking bomb that can bring down the economy, cause higher unemployment and lead to drastic cuts in future government services and programs.

Others are optimistic, expecting level of debt to recede as the economy improves, wars in Iraq and Afghanistan end, and unrestrained growth in healthcare is subdued. People on the ground are asking questions about the federal debt, how worried should we be? Is our generation passing on massive debt to our children and grandchildren?

A look at the U.S. federal debt today

The U.S. federal debt was more than $16 trillion in early November 2012, a figure so large that it is hard to comprehend in our everyday life. Just to give you an idea of largeness of the debt, its repayment would take:

  • 512 million years to repay at the rate of $1 per second.
  • All the gold produced in the world matches the federal debt
  • About all recoverable oil remaining in the U.S. matches the federal debt.

These examples show the situation facing us is very bad. Unless immediate steps are taken to pay down debts, the U.S. is headed over the fiscal cliff. On the other hand, let us follow a different perspective to get a true picture. The U.S. has positive leading attributes compared to the rest of the world.

  • Largest economy: with a gross domestic product (GDP) of about $15 trillion by 2012, the U.S has the largest economy in the world. Our GDP is about as large as the combined total of China, Japan, and Germany; the second, third and fourth-largest economies of the world respectively, yet still the United States is recovering from the effects of the 2009 worldwide economic collapse.
  • We have the richest citizens: the United States has the richest citizens as can be testified by the fact that in 2012, Forbes ranked the U.S. seventh richest per capita in the world, even though we have world’s third largest population with more than 300 million. The next country in Forbes list, the Netherlands has a population of 17 million. The number one country in the list, Qatar, has a population that could live comfortably in Philadelphia.
  • Large Asset Base: the Federal Reserve estimate total financial and non-financial assets of the United States to be more than $250 trillion. Few countries are as transparent with their economic figures, so it is difficult to draw true comparisons. But judging from this, it is safe to say the U.S. asset base is the greatest in the world.
  • Most attractive business environment: according to the World Economic forum, the U.S. remains one of the most competitive nations in the world. The U.S. ranks seventh in its 2012-2013 Global Competitiveness Report. China, considered to be the next great economic power, ranks 27th on the list.
  • We have the best credit in the world: even though we have a huge federal debt, the U.S. government debt is considered the safest in the world, with virtually no rival for its position. Even though China and Japan, who owe more than $5 trillion of the debt, still are eager purchasers of U.S. debt, with interest rates at less than current inflation rates.

Simply put, the United States is the greatest productive engine of the world, with unmatched economic, financial, and social assets.

When the federal debt is too high….

Even though the country’s debt continues to be attractive to buyers both domestic and foreign, it is a disadvantage to you if the debt becomes too large.  The disadvantages include:

  • Competition for funds: funds available to borrowers are finite at any given time. More demand for credit drives up interest rates in order to attract more capital. As a result, it becomes more difficult for borrowers to obtain funds for growth or maintain existing production.
  • Higher taxes:  when there is an increase in interest rates, countries are forced to devote more of their annual incomes to servicing their outstanding debt. As a result, the government raise taxes or cut down on government expenses, which often are government social programs.
  • Market competitiveness slows down: higher taxes result to increase in cost of production, thus the country’s products become less attractive to domestic and foreign buyers, leading to a downward cycle of economic and financial catastrophes.
  • Economic malaise: when the country cuts down on social programs and raise taxes, it results to social upheaval and economic recession, leading to rise in unemployment as businesses fail. This cycle can continue for years, and even decades.

It is the trend in national debt levels that concern most economists rather than its actual amount. The U.S. for years has had expenses greater than revenues, borrowing from the future to pay for the present. Of late, American expenses has shifted from investment to consumption-oriented. This has heightened the concern of economists. The U.S. has ignored the maintenance of its infrastructure, postponed the improvements needed in education, technology, and energy, instead opting for tax cuts, costly, expensive unnecessary subsidies to entrench influential interest groups. The current trend of increasing debt can deprive future generations of Americans economic success, continued world leadership and personal freedom.

Many economists agree that debt-to-GDP ratios above 90% are harmful to economic growth, simply because of the uncertainty they create in consumer’s minds. When the ratios go beyond 80% debt-to-GDP, negative economic effects begin. Some economist state that the current U.S. debt-to-GDP ratio is not sustainable long term. The question everyone asks is which measures to take to reduce the debt ratio and time period over which the measures should be effected.

  • Michael Flash

    The US Debt level is outrageous. How would Obama let us double our debt level during his presidency??!?

  • Bill

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  • Sakil Hossen

    The United States debt issue not only concerning for only US, it also directing to many other countries. I just wish this harmful economic growth needed to rise up certainly to a higher level. That’s it.