US Debt Course Work Example

US Debt Course Work Example

The amount of debt owed by the United States has been steadily increasing alongside the growth in the Gross Domestic product. In 1980, with a GDP of about 3 billion USD, the total debts stood at 1 billion USD. With an annual debt growth of 1.5 trillion USD, the total debt in 2000 was about 7 trillion USD, but it increased drastically in 2007. Currently, the total debts exceed the GDP, the total amount of services and goods produced in the country. On an individual level, the increase in debt resulted from the period of low interest rates, which followed the September 11 attack and the dotcom bubble burst, which created the boom in the housing market. This resulted in a sub-prime mortgage crisis and the global financial crisis followed in 2008. In response to the economic recession, the Federal government spent approximately 1.6 trillion USD and this created an enormous dent in the public finances (Wilson, 2012). The government also collected less tax revenue from individuals and companies hit by the financial crisis. The war in Afghanistan and Iraq has been a big burden for the public finances in the last decade, estimated to have cost approximately 1.25 trillion USD. The high levels of unemployment, which increased drastically in 2008, increased the amount of government spending on benefits payment and reduction of the tax rates. Since 2000, the United States has experienced a zero net job creation.

The U.S. is operating on a budget deficit and the deficit during the 2012 fiscal year was USD 1.327 trillion. In October 2012, the budget deficit stood at 120 billion USD. The spending increased by 16pc to USD 304 billion and the revenue increased by 13pc to USD 184 billion. Currently, the U.S government borrows 43 cents for every dollar it spends, four times the rate three decades ago. The U.S. government needs to borrow extra funds to operate because the deficit in the 2013 proposed deficit stands at USD 901 billion (Klimasinska, 2012).

The United States government borrows funds from foreign and domestic investors, Federal Reserve, and Social Security Trust Fund. The amount of debt the U.S. government owes to the foreign governments amounts to USD 5.3 trillion and the largest holders of the debt being the People’s Republic of China, which holds USD 1.2 trillion, a bigger amount than that held by the American Household(Wilson, 2012). Other countries, which hold the U.S. debt, include Japan, which holds USD 912 billion; U.K., which holds USD 347 billion; Brazil, which holds USD 211 billion; Taiwan which holds USD 153 billion; and Hong Kong which holds USD 122 billion. The Social Security Fund program that is the Social Security Trust Fund owns USD 2.4 trillion of the total debt (Wilson, 2012). Other programs that hold the debt include

– Federal Employees Retirement, postal Service Fund, Hospital Insurance Trust Funds and Life Insurance which owns USD 1.09 trillion;
– The Federal Supplementary Medical Insurance Trust Fund which owns USD 77.3 billion;
– Federal Deposit Insurance Corporation which owns USD 38.3 billion;
– Highway Trust Fund which owns USD 23.8 billion;
– Exchange Stabilization Fund which owns USD 22.9 billion and
– Unemployment Trust Fund, which owns USD 12.1 billion

The average interest rate on the debt during the 2012 fiscal year was 2.187pc. According to the Daily Treasury Statement on March 30, the treasury paid interest amounting to USD 104.413 billion during the first 6 months of the fiscal year 2012.

The European debt has an impact on the U.S debt because it is a potential threat to U.S exports. Euro zone is the largest U.S trading partner because it imports more than 20pc of the total U.S. exports. A trade deficit with the European Union affects the balance of payments of the U.S. and this raises the debt financing. In addition, the major banks in the U.S such as the Citigroup are tethered to those in the European Union and they have billions of money in the form of credit risks in the mostly affected countries including Spain, Italy, Ireland, and Greece. The current debt strains in the United States have serious implications on the existing Euro Zone crisis. The United States risks losing its credit rating and thus making it unable to repay its debts and if not handled well, the U.S debt crisis can affect the European Union (Warnock, 2012). The similarity between the U.S. debt crisis and the Euro Zone debt crisis is that they both have enormous implications on the global economy. The differences between the European crisis and the U.S. crisis is that in the U.S it happens in established financial, economic and political system while the Euro Crisis happening where there is no established economic and financial system.

The debt crisis is not just a U.S issue, it is a global issue because a default, or a downgrade of the debt will create turbulence in the global markets and increase the borrowing costs(Warnock, 2012). The demand in the global market reduces because U.S consumer is the main source of demand in the global market. The crisis also results in investments, remittances and drop in trade. The debt crisis in the United States leads results in the dollar losing value thus reducing the purchasing power in the world market. With the decrease in the dollar value, the prices commodities especially oil in the world market increases (Warnock, 2012). For example, the price of oil has increased from USD 26 per barrel in 2002 to USD 107 per barrel in 2012. If the value of the dollar had been stable like the Chinese Yuan, the price of oil could have been USD 82 per barrel.

The initiatives by the U.S government in reducing the debt include a call by President Obama last year to phase out the USD 4 trillion in 12 years or less with 75pc coming from interest savings and spending cuts while 25pc from reducing the tax breaks. On a personal opinion, the U.S government should majorly cut on the military spending because the country has used close to USD 1.3 trillion in the second Gulf War.

References

Klimasinska, K. (2012, Nov 14). Budget Deficit Widens as Fiscal Cliff Looms. Retrieved from
Warnock, E. (2012). How Dangerous Is U.S. Government Debt? Retrieved from
Wilson, G. (2012, Sep 4). U.S. Debt tops $16 trillion: So Who Do We Owe Most of That Money? Retrieved from

Leave a Reply

Your email address will not be published. Required fields are marked *