Current US Federal Debt & How It Affects Economy

US Federal Debt

According to a report, the USFederal debt amounted more than $21 trillion as recorded on 15th March 2018. The figure includes all outstanding debts. Two-third of this amount is owed to the public including individuals, firms and foreign countries.

The rest of the amount involves intra-governmental debt. The Treasury owes the debs to who own the Government Account Securities, with the trust funds having the largest share. They have been enjoying surpluses for years. The US government pays other departments out of these surpluses.

The above-mentioned amount is the largest sovereign debt for a single country in the world. The figure shows that America is closer to what the European Union owes. You need to remember that EU comprises 28 countries.

The value of what the country produces every year is smaller than what it owes. That reality makes it clear the country is having some problems in repaying the loans. It’s a matter of serious concern for the US government. If we go back three decades ago, we can see that the total debt of the country was only half of its domestic product.

How Such Huge US Federal Debt Affect Common People

If we consider the effects in short run, it is good for the voters as the entire economy stands to gain from deficit spending. It functions as an impetus for economic growth. The government incurs expenses for healthcare, building construction and defence equipments. The government gives the contracts to the private companies that hire employees for the projects.

These employees spend their government-subsidized income on groceries, entertainment, clothes and other necessities. This produces a ‘boosting’ effect on the economy. If the government directly hires employees instead of contracting the work to the private companies, the economy will enjoy benefits in the same way.

If we consider the impact in the long run, the effect is quite baneful. With the increasing debt-to-GDP ratio, the debt holders claim a larger chunk of interest as there is a higher chance that the debt will never be paid off.  Lower demand for Federal Treasury will further accelerate the interest rate. All these will slow the economic growth.

The value of US currency i.e dollar is intimately related to that of Treasury Securities. Lower demand for the latter causes the value of the dollar to take a nosedive. As a result, the foreign holders receive repayment in currency worthless. It creates a landslide in demand.

Understandably, the Federal Government has to pay a heavy sum as interest. The heavy debt burden pressing hard on the economy is a clear indication that the government is obliged to make a higher interest payment in immediate future.

Conclusion

It is easy to see that the government is trapped into a debt crisis. In the next couple of decades, the Social Security Trust will run out of its surplus to keep its promise of providing retirement benefits to the baby boomers. It could result into a higher tax as the country will be reluctant to take loans from the foreign sources. It is more likely that the government will curtail benefits instead of increasing the tax burden. It would hit the retirees hard. It will also trouble the people in the high-income bracket.

Do you think debt will have a similar effect on your country’s economy? Give reasons in support of your opinion.

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