United States can manage its debt


Over the last five years, Tea Party members and deficit hawks in the United States Congress have used European nations embroiled in sovereign debt crises as examples of unsustainable levels of deficit spending. The Eurozone, a region of 17 European member states united by a common currency, the euro, nearly collapsed because a handful of countries had debt levels exceeding 100 percent of the GDP, meaning their debt was worth more than all the economic activity in their nations in a year.

Victoria Cuthbertson | Daily Trojan

Victoria Cuthbertson | Daily Trojan

The idea of keeping debt below that level in terms of national output became a goal for the United States, and by extension a necessity for world economic security.

With the recently averted government default, the issue of American debt is back on the table.

The Heritage Foundation, one of the most conservative think tanks for U.S. policy, argued this summer that high debt is a real problem facing this country, simply based on the idea that debt, as an entity, is a problem. Following this logic, the United States must be headed toward serious economic collapse simply because U.S. debt exists.

Unfortunately, the analysis of Heritage and other conservative thinkers is misguided. Debt helps nations grow by bringing liquidity to markets and helps finance social programs that benefit people, creating better health and education in a state, which allows workers to find better jobs requiring an educated workforce. Furthermore, when countries are experiencing inflation, as the United States has been for decades, borrowing becomes cheaper. Borrowing money during inflationary periods reduces the cost of borrowing and allows greater liquidity in the markets. Besides, since the U.S. government is considered a near rock-solid investment by ratings agencies such as Moody’s and Standard and Poor’s, the cost of borrowing for the United States remains low. The United States has many advantages in borrowing money as the biggest economy in the world. Because of this, comparisons between countries such as Greece and the United States are simply not useful.

The reason that debt became a problem for countries such as Greece is because those countries took on too much debt relative to their position in the world economy. The United States isn’t even close to reaching an upper limit on its borrowing capability. Granted, if the United States does do this, the world will face serious economic consequences, but debt at this stage is not as big of a problem as the Tea Party believes.

The only apt comparison for the U.S. economy is the Japanese economy. Japan’s level of debt is currently greater than 200 percent of the GDP, but 10-year bond rates remain low, meaning that investors are still willing to put money into Japan. Japan is now facing some trouble because servicing the debt requires so much money every year, according to the Economist. Japan has yet to face serious economic consequences as a result of high levels of debt.

The situation is better in the United States than it is in Japan. Treasury bond rates are at extreme lows, and even lower now that the United States has backed away from a government shutdown and default, according to NPR. Like Japan, the United States continues to have high levels of investor confidence, meaning low interest rates on bonds. Essentially, the U.S. debt costs almost nothing at current interest rates, so there is not much incentive to lower borrowing, especially if that would stifle growth.

The only time that U.S. debt might become a problem for the United States, and by extension the world, is if consumer confidence begins to fade and the United States needs to increase treasury bond yields to compensate for the drop in demand. Fortunately, as the Council on Foreign Relations reported recently, demand for U.S. bonds is still high, and rates are still low. There is no reason to panic at this point.

At this time, a better course of action is for the United States to continue to borrow money to finance daily government functions and create growth. The United States and the world are just beginning to emerge from the repeated financial disasters of the last half decade, and given the United States’ place in the world, it is better for the United States to grow before addressing a domestic debt problem. Wait for some serious economic recovery before tackling the debt issue — this is not anywhere close to a crisis.

 

Dan Morgan-Russell is a sophomore majoring in international relations (global business). His column “Going Global” runs Mondays.

Follow Dan on Twitter @ginger_breaddan 

3 replies
  1. Thekatman
    Thekatman says:

    Dan:
    What you have failed to understand is the relationship of the purchasing value of the dollar as compared to the amount of debt incurrd. You state the C f r finds no problem with incurring debt, but that is a typical response from the CFfR, one of the prominent, progressive liberal think tanks. The CFR os wrong on this one.

    Under the current president, this country’s debt has tripled and the Dems in the Senate, namely. Harry Reid, has stated that they will continue to spend. Hogwash. The purchasing value of the dollar has dropped considerably over the past 6 years, and more so since the late 70’s. In order to pay for this debt, the federal reserve has to print more money, and by doing so, dilutes the dollar and confidence in our monetary system.

    You probably don’t undetstand the real world of financeand politics, because you’r a young man starting out in the world, away from home, and perhaps have a nice little job to have some exa money.

    Until you are fully on your own, making your own money, having to save for a home, a nice car, and living on you own paycheck, You will not understand.

    If you think the Democrat’s irresponsible spending habits can be sustainable, you’re not thinking this through. Under the current trends, you and your grneration will be saddled with so much debt, you will be taxed at extremely higher tax rates than today. It will not be unusal for you to be paying taxes upwards oft 70 percent in 15 yrs, if you and your generation don’t intervene and lobby your congresional representative and Senators to stop the madness.

    Enjoy your college llife, study hard, take the classes that will help you to be a success in whatever you do, because when you get into the real world, outside the protctive blankie of mon, dad and school, and on your own, then you will understand the true value of money, finance, dedbt which you will incur, but you will allow for it to get out of control. Government is no different. Our current fiscal policy is out of control is is irresponsible to the American public.

    Why do you think China is working towrds taking the world off of the US currency ie Petro Dollars and using their currency as the global trading mechanism? If they are successful, which. Hope they are not, this country will go into default and the value of the dolar will plummet, in large part to the amount of debt.

  2. Liberty Minded
    Liberty Minded says:

    The term bond has its roots in bondage. Debt is a way of controlling behavior. The debt holders are the ones in power. The vast growth in US Government debt has consequences. Like the junky looking to fund another hit of the stuff, the debtor will soon turn to any means necessary to get the next fix. Would the IRS be administering the ACA, if there was only $1 trillion instead of $17 trillion of debt? What about our foreign policy, would the USA be so interested in attacking in dozens of countries if we had zero debt? How about banking privacy; would the USA still threaten banks in Switzerland if there was not $100 trillion in benefits promised to senior citizens?

    Debt is a heavy burden for a person, a family, and a government.

    • thekatman
      thekatman says:

      I agree with Liberty Minded, and his/her typing sills are much better than mine on that lousy iPad kybrd.

Comments are closed.