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National Debt of America
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The National Debt of United States
The United States of America has been facing the issue of debt from 1790 to the current date. The country found itself in debt as a result of the Revolutionary War that took place in1790. Debt has severely increased over the centuries due to war, recession and inflation in the global view. In the modern America, the government has struggled to spend less in the last 60 years hence making the budget impossible to balance. National debt refers to the net accumulation of the federal government’s annual budget deficits. The level of national debt increased during President Ronald Reagan’s tenure, and this subsequently led to an upward trend to other presidents’ eras. The American national debt has increased in the last two decades with the Clinton’s administration showing a downward trend in debt levels.
In the current administration, there are political disagreements about impact of national debt that have led to delays in budget proposal and appropriation. The economists and policy analysts analyze the economic principles that relates to national debt. The economic principles include federal deficit, budget deficit and government debt and deficits. The Federal Deficit is an economic principle and concept that is measured through the arbitrary choices of labeling government receipts and payments (Palmer, 2017). The current American generation consumes more of the products produced within the country. This results to a reduction in the amount Americans save and invest for their future needs. A lower productivity results because the citizens have less capital to use for investment. When the capital for investment is limited, the interest rates increases and subsequently, return rates increases. The principle provides for the government to carry out real economic policy and report any deficit it wants.
Additionally, Government Debt and Deficit is economic principle that the government issue debt whenever it borrows from the public. The size of the outstanding debt is equal to the cumulative amount of the net borrowing the government has done. The deficit is the addition in the current period to the outstanding debt. A debt that occurs when the outstanding value falls is a surplus. The direct measures of the effect of the government debt and deficit on economic activity are clear in principle but challenging to apply in practice. A concept of Ricardian equivalence that explains more on government’s debt and deficit is also discussed. It states that ‘If people do not foresee the future taxes implied by the government debt, then they feel wealthier when debt is issued but poorer in the future when, unexpectedly, they have to pay higher taxes to finance the interest payment.’ The third economic principle is the budget deficit that entails the excess spending over income for a government over a particular period of time. A budget deficit is a spending that has been accumulated by federal government of America and financed by issuance of Treasury Bonds (Lundahl, 2017). The federal government generates a budget deficit whenever it brings in little money through income-generating activities. In order for government to operate effectively, the treasury department issues treasury bills and bonds. These bills and bonds will offer securities to government over the spending strategies.
The macroeconomic indices or indicators are economic statistics which the government agencies and private organizations release periodically. The indicators provide insight on the economic performance of a country, which is significant to the Forex Market. The macroeconomic indices include Gross Domestic Product (GDP), Consumer Price Index, Trade Balance, Unemployment Rate and Consumer Confidence Index. Gross Domestic Product refers to the total market value of goods and services produced within a country in a period of time. This also includes production done by foreign companies working within a country’s territory but excludes production by domestic companies abroad. Gross Domestic Product is one of the most useful indicators that show the strength of American economy. It shows the market value of goods and services produced within a country in a particular period of time. The Gross Domestic Product contains the following key components: net exports and government spending, consumption, investment and inventories. Gross domestic product requires an effective understanding of the components to help determine its relation to national debt. The personal consumption makes two-thirds of the United States GDP. A rise in the gross domestic product is an indication that the American economy is growing. This attracts many investors to the country and it results to an increase in the strength of US dollar.
In addition, Consumer Price Index is the measure of change in the cost of consumer goods and services. Consumer Price Index is an indicator used to measure US inflation rate. The index shows track changes in prices of goods and services produced in the market by measuring price changes of goods from one period to another. The goods include items such as food, clothing and utilities (Zhang, 2017). Apart from measuring inflation, Consumer Price Index can also be used to determine the US poverty threshold and how government finances should be allocated. The index does not take into account the fluctuating prices of the products as well as discounts offered on the commodities. The consumer price index has influence on interest rates that affects inflation. An increase in consumer price index leads to growth in interest rates and thus makes interest rates to be high and attractive. The American dollar strength rises when the Consumer Price Index also increases.
Thirdly, Trade Balance is the difference achieved between a country’s imports and exports. Trade Balance is a macroeconomic indicator that is calculated by subtracting aggregate imports from aggregate exports. A country where the exports are greater than imports then there is a trade surplus while with greater imports than exports then a trade deficit exists. America used to have greater exports than imports hence it records trade surplus. Trade surplus shows an inflow of foreign currency into the United States which boosts its dollar strength. Currently, America has been faced with trade deficit. Trade balance figures have an impact in Gross Domestic Product forecast because imports and exports are factored into GDP. Another indicator is Unemployment Rate, which refers to the measure of percentage of unemployed workers in the American workforce. Unemployment rate is considered as one of the most important economic indicators. It is calculated every month through random surveying of households and businesses. The random survey only applies to the individuals who are looking for work with the natural rate of unemployment considered to be about 5% in America. During the periods of low unemployment, the wages increases at a faster rate leading to inflation. A decrease in unemployment rate always boosts the American dollars.
Lastly, Consumer Confidence Index is another major indicator. The Consumer Confidence Index is the measure of the confidence in consumers in kinds of commodities they purchase. This involves a survey of households to gather their sentiments and expectation of the commodities (Blumenthal et al 2017). The individuals and households are asked about the current economic growth, their personal financial situation as well as where they think the economy of the country is heading. An increase in consumer confidence index results to an increase in a positive economic growth while a decrease indicates a reduction in economic growth. The United States of America’s dollar records an increase when the consumer confidence index also increases.
National debt plays a significant role in economic progress of America and it is measured appropriately to convey long-term impact it present. Evaluation of the national debt to country’s gross domestic product is not a best approach. Gross domestic product is too complex and difficult to measure accurately. National budget needs a simple determination of the amount the government spends in a financial year. Gross domestic product is very complex because its calculation involves determining the imports and exports of a country. Also the national debt is always paid back with tax revenues with an exclusion of gross domestic product. The national debt cannot be compared to the gross domestic product because they are both different economy drivers. The best approach to use is to compare the interest expense paid on the national debt in relation to expenditures made on government services like education and transportation (Viner et al 2017). Additionally, using an approach where national debt is focused on per capita basis gives a position where the country’s debt level stands. For example, if people in America are told that debt per capita has reached $30,000, they are likely to understand the issue. On the other hand, if they are informed that the national debt level has reached 60% of gross domestic product, they will not understand the weight of the issue.
In addition to that, America is faced with high unemployment rate that has led to low economic growth. The American government has tried to reduce the high unemployment rate but has not found the successful strategies in their efforts. The huge national debt of the country has led to most citizens being unemployed. The huge debts created as a result of borrowing and spending has made the businesses to close with others limiting their recruitment chances. These exercises has made unemployment rate to increase in America. High unemployment rate are caused by slow economic growth that has been created by high debts. Unemployment rate is measured by U.S gross domestic product. Whenever the gross domestic product declines, businesses lay off workers and unemployment goes up. The jobless people have less to spend and this worsens their situation. The current debt and spending in America are high with the future debt and spending being on track to rise higher due to increased spending. High national debt drives interest rates up which then leads to increased price inflation. The implication is severe on most Americans with the poor, middle class and the elderly suffering most.
The appropriate evaluations and decisions that can be made from the American national debt are of different views. First, America can involve interest rate manipulation to generate tax revenue that will reduce the national debt. The United States policymakers can learn from Japan to avoid economic stagnation caused by national debt overhang. The Japanese national debt was solved through ensuring that most jobs were created to people in order to reduce inflation rates. Additionally, the policymakers ensured that the country borrows little to fund the developmental projects within the country. The developmental projects like industries and roads would then aid in generating revenue that would later be used in repaying the money borrowed. This method ensured Japan is relieved from high national debt it might have faced.
Secondly, the economists should come up with a public policy standpoint. The issuance of the debt will ensure the public use its proceeds to promote its growth. This will ensure America achieve a long-term prosperity towards reducing its national debt. A debt used to fund economic expansion in the current and future generations would be significant value. Subsequently, economists in United States should make decisions that involves coming up with adjustments for national debt to be reduced. The adjustments will cover monetary values of an economy’s output. The inflation will be reduced due to debts America has accumulated and ensure they arrive at the economies real gross domestic product. Increase in the national debt per capita will make the American government to raise yields on treasury securities. This will reduce the amount of tax revenue to spend on services offered by government. This method will make people to experience lower standards of living with borrowing being on a rise.
Thirdly, the American government can raise taxes to cut spending costs received in the country. It is a common tactic that can be used to ensure the national debt is reduced. The raised taxes are essential in making up for the spending America has been engaging in. This decision will ensure that cash-flows increase while spending is reduced. Failure of implementing this will lead to inflation in the country as well as slow economic development. Spending cuts the national debts while tax increase reduces the government debt.
The American government borrowing for the national debt reduction can be in the form of issuing financial securities or borrowing from world-level organizations. The organizations like the World Bank or private financial institutions. This borrowing has an effect on the national debt. The national debt information has made America to come up with public debt that is calculated on a daily basis. The government can borrow money from the public debt to help in offsetting the national debt. The total amount of money that the government can borrow without any authorization from the Congress is known as total public debt. The national debt can be reduced through the following mechanisms: increased taxation reduced spending, monetization of the debt and debt restructuring.
In a nutshell, the economic situation in America has led to many expenses which has caused national budget to rise. National debt leads to accumulation of budget deficits that makes a country to lag behind in terms of employment and economic growth. America is facing huge national debts that have led to many people being jobless. The top United States expenses that constitute the major factors of national debt need to be reviewed to help promote economic growth.
References
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Findlay, R., & Lundahl, M. (2017). International trade and factor mobility with an endogenous land frontier: Some general equilibrium implications of Christopher Columbus. In The Economics of the Frontier (pp. 261-281). Palgrave Macmillan UK.
Long-Tolbert, S., & Zhang, J. (2017). An Exploratory Study of Consumer Price Mastery Index: A Self-Efficacy Perspective (An Abstract). In Creating Marketing Magic and Innovative Future Marketing Trends (pp. 489-490). Springer, Cham.
Salami, J. A., Warraich, H., Valero-Elizondo, J., Spatz, E. S., Desai, N. R., Rana, J. S., … & Blumenthal, R. S. (2017). National trends in statin use and expenditures in the US adult population from 2002 to 2013: insights from the medical expenditure panel survey. Jama cardiology, 2(1), 56-65.
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