By Aiden Singh, Columnist
Prior to its conclusion, with the credit crisis of 2008, easy credit availability was much too enticing to pass up. Many Americans bought homes both as utility and investments that were by no means affordable. The idea was that as the property value rose, they could simply refinance and tap the new equity in their homes. Many of those same Americans held five, six, or even seven credit cards. Naturally, the free markets corrected this excess painfully. It would appear that the same abuse of easy credit currently plagues the U.S. Government.
The United States has held the title of the world’s largest and most important economy for decades. Consequently, we bare a great burden of responsibility. As goes the U.S. financial markets, so goes the world. Consider the credit crisis of 2008. With the world’s largest consumer nation in dire economic straights and the financial system on the brink of collapse, the rest of the world – tethered to us at the hip- naturally followed us into the abyss. Our running of a massive budget deficit is the antithesis of the financial discipline warranted by such a significant position.
Yet, it would appear as though this figure is on an unstoppable rise to infinity. No man can (or at least has the will to) stop its ascent to unimaginable numbers that Wall Street’s best investment bankers couldn’t surmise. At the time of this publication it stands at $12.43 trillion, approximately 89 percent of the total U.S. Gross Domestic Product. We have historically reached higher debt to G.D.P. ratios, for example during World War II. However, addressing the debt this time seems nearly impossible, as our economic prospects remain dire. The dilemma arises in that tackling the sluggish economy and reducing our national debt are two distinctly incongruent actions. Currently the economy remains on life support, with the government doing all it can to make up for the slowdown in consumer spending (although economists debate the merits of such actions).
Consequently, we are forced to add to the government’s tab to fund such projects. Also, reducing the national debt would entail increasing taxes and decreasing government spending: on the local, state, and federal levels. Essentially, it becomes impossible to simultaneously address both matters. As such, it is safe to presume that we will continue to see an increase in the national debt considering the slow economic recovery we are experiencing.
The swelling of the U.S. debt has been funded by the world’s need for American dollars, as it acts as the world’s reserve currency. Furthermore, the United States treasuries (government debt) have long been considered the world’s safest investment- the U.S. has never defaulted on its debt. As such, when fear paralyzes the markets, money flows into U.S. debt (and naturally its currency). But what if the U.S., a nation with a ravenous hunger for living beyond its means, digs itself too deep a hole? What if the debt becomes, as its current trajectory would indicate, insurmountable? What if the fear of possible trouble in paradise, shocked investors (the holders of our debt) into reality? What if access to the capital we so desperately depend on became harder to attain and the interest we are forced to pay on debt rises? How badly might it hinder our economy, with the government struggling to fund its expenditures? Would the currency experience severe devaluation?
One fact remains clear: addressing the deficit must become priority number one for the nation well before any of the presented possibilities becomes reality. The recent scare of Greece (its total GDP is about 2.4 percent of the U.S. GDP) potentially defaulting on its sovereign debt reeked havoc on the capital markets. Trouble, even if just perceived, in the U.S. might send the markets into outright panic.
The United States has become the world’s largest liability; a country whose savage propensity to live beyond all logical means has resulted in a massive debt to be bared for generations to come. An ever-growing national debt presents a substantial threat to the stability of the financial markets. And, as history has showed us, excessive debt cannot be sustained forever.
