United States Debt-Crises

Introduction

The world’s largest economy is facing a grave crisis. The United States' debt has reached unprecedented levels and has become increasingly common in financial news, sparking concern among economists, policymakers, and citizens alike. While the issue is complex, it has far-reaching consequences that could affect global markets.

Historical Context

The history of U.S. debt is as old as the country itself. However, the modern debt situation began taking shape post-World War II, exacerbated by periods of economic downturns, wars, and policy decisions. In 1971, while moving away from the gold standard allowed for more flexible monetary policy, it also paved the way for unrestrained borrowing.

Current Status

As of September 2023, the U.S. national debt was approximately $28.4 trillion. What's even more alarming is the debt-to-GDP ratio, which stood at about 125.7% according to the World Bank. These numbers are not just abstract figures; they have real implications for the U.S. economy, affecting everything from inflation rates to unemployment.

Factors Contributing to the Debt

Several elements contribute to the burgeoning debt:

Military Spending: According to the Stockholm International Peace Research Institute, the U.S. spent around $732 billion on its military in 2020.

Healthcare Costs: The U.S. healthcare system is one of the most expensive in the world, adding to the financial burden.

Social Security: An aging population means more people are drawing on social security, which is financed through borrowing.

Tax Policies: Changes in tax policies, especially reductions in corporate and high-income taxes, have significantly impacted revenue.

Economic Policies: Stimulus measures, especially during economic downturns, have led to increased borrowing.

 

Global Implications

The U.S. debt crisis isn't an isolated problem; it has ripple effects across the globe:

Currency Fluctuation: The U.S. dollar serves as a global reserve currency, and any devaluation could lead to global economic instability.

Foreign Investment: Countries like China and Japan, who are significant holders of U.S. debt, could see their investments devalued, straining international relations.

Potential Solutions

There's no silver bullet for solving the U.S. debt crisis, but some proposed strategies include:

1)     Public-Private Partnerships for public projects to reduce government spending

2)     Implementation of the National Sales Tax on most goods and services as a consumption levy.  Implemented by Canada and Japan

3)     Opening the Borders to immigrants that might increase consumption and boost entrepreneurship. Though politically controversial, it is a fact that immigrants start businesses at twice the rate of native-born US citizen. This can accelerate the creation of businesses that pay taxes.

4)     Increasing the retirement age to 70: Pension age is determined on one's birth year, people born after 1960 or later the retirement age is 67. Raising this age to 70 or beyond may prove beneficial for the US in terms of working on its debt crisis

5)     Raising Taxes: Though politically contentious, increasing taxes, especially on the wealthy, could generate extra revenue to pay down the debt.

Interplay of politics

The Democratic party supports higher spending on social programs and infrastructure, funded by increased taxation, especially on corporations and the wealthy. During the crisis, they preferred a "clean bill" to raise the debt ceiling without any preconditions. However, the Republican Party proposed to decrease the spending to 2022 levels as a condition to raise the debt ceiling. In the end, the government ultimately increased the debt ceiling but added a cap on the federal spending

 

Conclusion

The U.S. debt crisis is a multi-faceted problem that requires a comprehensive solution. While it's easy to point fingers and lay blame, the reality is that resolving the crisis will likely involve a combination of spending cuts, tax hikes, and perhaps most importantly, a collective will to act. As the debt continues to climb, the time to address this looming crisis is now.


Timeline of 2023 crisis:

January 19, 2023: The United States hit its debt ceiling, leading to a crisis. Secretary of the Treasury Janet Yellen began enacting temporary "extraordinary measures".

May 1, 2023: Yellen warned these measures could be exhausted as early as June 1, 2023, later pushed to June 5.

During the crisis, the Republicans proposed cutting spending back to 2022 levels as a precondition to raising the debt ceiling, while Democrats insisted on a "clean bill" without preconditions.

Potential Consequences: If the government ran out of funds, it faced either defaulting on payments to bondholders or curtailing payments to various entities, risking a global economic meltdown.

May 27, 2023: President Biden and then-House Speaker Kevin McCarthy struck a deal to increase the debt ceiling but cap federal spending.

May 31 - June 3, 2023: The Fiscal Responsibility Act of 2023, which emerged from the Biden-McCarthy deal, passed the House on May 31 and the Senate on June 1. President Biden signed it into law on June 3, ending the crisis.