FINANCE
The Star Indebted Banner
by Diego Jasson
2016-03-11 08:00:00
The U.S. Federal debt is approaching an astonishingly high number of 20 trillion dollars. U.S. debt holds our country hostage and is the greatest threat to the U.S. economy.

Today, many are split over the future of the US economy and the challenges it is currently facing. Yet since the mid 20th century an endemic problem has hung over the success or even existence of the US economy. As the national debt continues to grow, so does the challenge faced by the American economy.

In the last 40 years, only four have had a surplus, and the national debt has ballooned more than 10 times from roughly 2 trillion thirty years ago to 19 trillion dollars today, and continues to grow. As seen in Europe during the European Sovereign Debt crisis, a country defaulting on its bonds and other debt obligations can have disastrous consequences for national and international economies. The United States has the tenth worst debt to GDP ratio at 1.02 times in the world, with Japan in first with 2.30 times. A US default could very easily put the United States into a recession similar or worse to the Great Depression. Currently sitting at around 19 trillion dollars, the growing national debt seems to have only a few solutions.

Since tax revenues only fundamentally increase when the economy grows, the United States could grow out of the national debt. Unfortunately, with the government consistently running a structural deficit and US growth over 10% unfeasible, it seems like the American economy will never be able to outgrow the debt, either through increased tax revenues or government surpluses.

Since the US economy depends on the US honoring its debt obligations, another fix to the debt crisis would be to refinance the debt, extending maturity or renegotiating rates. Unfortunately, even refinancing does not completely solve the problem; the Government would only be buying time as the debt would still be due down the road. In addition, refinancing would theoretically put pressure on the US dollar, as traders practice Covered Interest Arbitrage in an attempt to reap the rewards of a refinancing. The implications of refinancing make it not only undesirable for the government, but also practically impossible, given the sheer size of the National Debt. The only solution left to the Government is therefore printing money.

Were the government to print money, it would be able to pay off the debt by the subsequent devaluation of the US dollar and therefore the devaluation of the national debt. The printing of money, however, has many undesirable implications. Firstly, it would be an egregious violation of central bank literature, such as David Riccardo’s firm belief that monetary policy should not be used for the monetization of government budgets. The monetization of the national debt would signify a complete lack of independence for American monetary policies and encourage other countries to irresponsibly fund their budgets through monetary policy.

The second devastating consequence of printing money to pay off the debt would be the severe inflation in the United States as the money supply astronomically increases. It has been empirically proven that inflation has long term growth effects, with devastating consequences for economies. The dangers of inflation and hyperinflation are behind the central banking world’s goal of price stability at 2%, which is the most conducive to sustainable economic growth.

There is no simple or easy solution to the American debt problem. No ideology or party has proposed a solution that would effectively reduce the national debts, and with administrations passing down a larger amount of debt to the next, it would seem a lack of interest in the subject matter exists, particularly on Capitol Hill. The best solution to the crisis would be a long term reduction in debt combining all the aforementioned measures.

Yet, if American politicians and private agents fail to address and demand that the current National debt be reduced, a bleak and weak future awaits the American economy. No one can predict at what point the United States will no longer be able to respect its obligations. When that day comes, the American economy will collapse. With a credit contraction never before experienced and the markets’ utilization of US debt as safe havens, the financial and economic damage would be impressive. But like any challenge, the American national debt crisis can be overcome, through bipartisan compromise and patience. After all, it would not be fair nor in the American spirit to leave a crippled American economy to the next generation of American innovators, entrepreneurs, financiers, industrialists, and workers.



The Star Indebted Banner

Today, many are split over the future of the US economy and the challenges it is currently facing. Yet since the mid 20th century an endemic problem has hung over the success or even existence of the US economy. As the national debt continues to grow, so does the challenge faced by the American economy.

In the last 40 years, only four have had a surplus, and the national debt has ballooned more than 10 times from roughly 2 trillion thirty years ago to 19 trillion dollars today, and continues to grow. As seen in Europe during the European Sovereign Debt crisis, a country defaulting on its bonds and other debt obligations can have disastrous consequences for national and international economies. The United States has the tenth worst debt to GDP ratio at 1.02 times in the world, with Japan in first with 2.30 times. A US default could very easily put the United States into a recession similar or worse to the Great Depression. Currently sitting at around 19 trillion dollars, the growing national debt seems to have only a few solutions.

Since tax revenues only fundamentally increase when the economy grows, the United States could grow out of the national debt. Unfortunately, with the government consistently running a structural deficit and US growth over 10% unfeasible, it seems like the American economy will never be able to outgrow the debt, either through increased tax revenues or government surpluses.

Since the US economy depends on the US honoring its debt obligations, another fix to the debt crisis would be to refinance the debt, extending maturity or renegotiating rates. Unfortunately, even refinancing does not completely solve the problem; the Government would only be buying time as the debt would still be due down the road. In addition, refinancing would theoretically put pressure on the US dollar, as traders practice Covered Interest Arbitrage in an attempt to reap the rewards of a refinancing. The implications of refinancing make it not only undesirable for the government, but also practically impossible, given the sheer size of the National Debt. The only solution left to the Government is therefore printing money.

Were the government to print money, it would be able to pay off the debt by the subsequent devaluation of the US dollar and therefore the devaluation of the national debt. The printing of money, however, has many undesirable implications. Firstly, it would be an egregious violation of central bank literature, such as David Riccardo’s firm belief that monetary policy should not be used for the monetization of government budgets. The monetization of the national debt would signify a complete lack of independence for American monetary policies and encourage other countries to irresponsibly fund their budgets through monetary policy.

The second devastating consequence of printing money to pay off the debt would be the severe inflation in the United States as the money supply astronomically increases. It has been empirically proven that inflation has long term growth effects, with devastating consequences for economies. The dangers of inflation and hyperinflation are behind the central banking world’s goal of price stability at 2%, which is the most conducive to sustainable economic growth.

There is no simple or easy solution to the American debt problem. No ideology or party has proposed a solution that would effectively reduce the national debts, and with administrations passing down a larger amount of debt to the next, it would seem a lack of interest in the subject matter exists, particularly on Capitol Hill. The best solution to the crisis would be a long term reduction in debt combining all the aforementioned measures.

Yet, if American politicians and private agents fail to address and demand that the current National debt be reduced, a bleak and weak future awaits the American economy. No one can predict at what point the United States will no longer be able to respect its obligations. When that day comes, the American economy will collapse. With a credit contraction never before experienced and the markets’ utilization of US debt as safe havens, the financial and economic damage would be impressive. But like any challenge, the American national debt crisis can be overcome, through bipartisan compromise and patience. After all, it would not be fair nor in the American spirit to leave a crippled American economy to the next generation of American innovators, entrepreneurs, financiers, industrialists, and workers.