U.S. National Debt Essay Sample
- Word count: 1337
- Category: government
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U.S. National Debt Essay Sample
In 2012, reelection polls show that the biggest concern expressed by the voters was the economy and national debt. Many economists, political leaders, and citizens are under the impression that America’s rising debt and purchasing of national debt bonds by the foreign countries will lead America to its inevitable bankruptcy. Some speculators predict that one day China will realize that the dollar is no longer valuable to hold because of its devaluation; therefore, Chinese will no longer purchase our national debt bonds which will lead to the collapse of American financial markets. Others think that the precious metals and commodities will drastically increase in value leaving the dollar worthless and resulting revolts in America. The U.S. Nation Debt is explained and quantified by its significance in terms of debt-to-gross domestic product ratio.
The national debt is more controversial today than the future of America. Political leaders along with the economists continue to spread negative propaganda regarding the state of economy to benefit financially or for the sake of political motives. However, there seems to be various pessimistic views on the economy and yet there is no one interested in addressing and providing an optimistic solution; therefore, it is important to understand the ownership aspect of America’s national debt. In principle, any entity who has bought United States Treasury bills, Notes, or Bonds has lent money to the U.S. government hence they hold the U.S. national debt. It is crucial to understand that the segregation and differentiation between the types of debt holders. The first type is the “public debt” which is held by financial institutions, foreign governments, and individuals. The second type is the “U.S. Debt” which is held by the government and its intergovernmental departments such as Federal Reserve Bank, Social Security Trust Fund, and Pension Funds etc. Beside the ownership types of public and U.S. debt, the additional important aspect is the specifics of nation debt amounts.
The U.S. national debt is held by various entities. The breakdown of U.S. nation debt: Federal Reserve and Intergovernmental department holding $6.328 trillion, Pension Funds $842.2 billion, Mutual Funds $653.5 billion, State and Local Governments $484.4 billion, Depository Institutions $284.5 billion and insurance companies $250.1 billion, other investors $1.107 trillion, China $1.132 trillion, Japan $1.038 trillion, UK $429.4 billion (Toscano). In essence, the Government of United States holds $9.5 trillion in debt to itself (Federal Reserve, Intergovernmental department, Pension Funds, Mutual Funds, State and Local Governments, Depository Institutions, insurance companies) and an additional $4.6 trillion is owed to the U.S. investors (other investors, China, Japan, UK).
Based on the aforementioned facts America owes 9 trillion to America. Economists and other political leaders are fully aware that a country who owes debt to itself is not in any imminent danger of financial collapse; however, perpetrators continue to spread negative publicity for the sake of market speculation and their own financial agendas. The real problem is not the size of debt – it is the politics and financial wars which are being played by other countries to gain power and dominance. They key factor is that foreign debt is held in dollars which means U.S. can payback in its own currency, but other speculators point out that the debt is simply too high.
Today majority of the propaganda surrounds the national debt concern such as it is too high but most people do not understand that the true relevance of the national debt. As per US national Debt clock, as of November 13th, 2012, the outstanding national debt is at $16.2 trillion, and it continues to increase an average of $3.88 billion per day. It is huge debt but how do we know what is considered huge? For example, assume Mr. Average Joe is in debt for $300,000 for his home, and Mr. Rich Guy has a $5 million mortgage on his house. Just by looking at the debt it would be impossible to tell who is in distress; we will need to know their incomes to gauge their financial situation. Accordingly, if Average Joe’s income is $10,000 per year and Mr. Rich Guy’s income is $100 million per year, then we can distinguish that Mr. Average Joe is in trouble because he cannot afford to make payments on his debt; on the other hand, Mr. Rich Guy has no problem in making payments. Hence, Mr. Rich Guy is not in trouble.
As demonstrated the debt amount itself has no significance unless it is contrasted with the income levels. Though, there is a unique measurement tool available for this purpose; it is called debt-to-income ratio. Similarly, governments can also measure their income and expense, but instead of calling the debt to income ratio it is called Debt-to-Gross Domestic Product ratio (debt-to-GDP). Currently, the U.S. debt-to-GDP ratio is about 105% (US National Debt Clock). This ratio shows that America is spending more than its income. Japan currently has a debt-to-GDP ratio of more than 230% (Washington), it is the third strongest nation on earth and its government has no trouble borrowing at low interest rates. Further, according to US Government Spending federal debt exploded during World War II to over 120 percent of Gross Domestic Product (GDP). Despite the high GDP ratio there were no implications on the economy and the eventual transition to the lower GDP levels in the forthcoming years was achieved.
It is clear that the debt amount itself is not a unit of measure unless it is compared to an income, and as demonstrated the GDP as high as 230% does not pose a threat; instead, it influences nations towards positive economic changes given the fact that political leaders are up for the task. Another market speculation is that at some point China will start cashing U.S. national bonds due to the dollar devaluation concerns; therefore, the selloff will create panic and crash the U.S. financial markets. Recently, Bloomberg published a report by Tony Capaccio and Daniel Kruger stating that as of June 2012, China’s holdings of U.S. government securities were $1.164 trillion as per Treasury Department’s data and China’s withdrawal of national debt bonds does not pose a national security threat, according to a first-ever Pentagon assessment. For whatever reason, if Chinese sell the dollar holdings, they will jeopardize their GDP growth along with the negative impact on their economy. It is not logical to assume that China cashing the US debt bonds will crash US market because the bonds amount held by Chinese is less than 8% of total national debt. In any case, the debt is held in dollars and it can be paid simply by printing or borrowing more money from the Federal Reserve Bank hence it is not a threat and it is merely a speculation.
In conclusion, U.S. national debt and public debt is held by the government. Which means U.S. can pay off its debt anytime in dollar since the debt is held in dollar. Further, America does not need to borrow since it has the power to create its own currency; hence, Chinese debt can be paid off at any time. The debt-to-GDP ratio of America ratio does not impose any negative impact as Japan’s economy has demonstrated no trouble in managing its debt and borrowing from the central banks. However, there are alternative solutions to fix the debt crises, such as substituting gasoline with alternative energy sources, raising taxes, reforming entitlements program, and cutting down government spending to achieve a balanced economy. It is a difficult task but it can be achieved.
Toscano, Paul “Biggest Holders of US Government Debt“ Yahoo! Inc. 3 Feb. 2012, Web.13 Nov 2012.
Tony Capaccio and Daniel Kruger. “China’s U.S. Debt Holdings Aren’t Threat, Pentagon “ BLOOMBERG L.P. 10 September 2012. Web.13 Nov 2012
US national Debt Clock, n.d Web.13 Nov 2012.
“US Federal Debt Since 1900 “, n.d. Web.13 Nov. 2012
Washington, R.A. “Fiscal sustainability Defying gravity“ The Economist Newspaper Limited 2012, 14 Aug. 2002. Web.13 Nov 2012