American Debt Weighing Heavily On The Economy

A new wave of debt obligations from the US could reduce it to an unreliable borrower in the future; claim a number of sources in the world of international finance. The country has a total of over 12 trillion dollars in debt, and it is estimated that interest payments in 2019 could alone top over $700 billion a year, even if the deficit shrinks faster than usual.

The situation has come about primarily due to the current economic recession, where the government has pumped funds into the economy in the hope of revival. This has led to a ballooning deficit in the budget, which has been made up by large amounts of short term borrowing. With interest rates currently low, the economy is able to stabilize, and interest payments on borrowed funds are low. However, if the interest rates go up, the interest payments would soon balloon to unmanageable proportions. Though the government move is widely regarded as being necessary, the subsequent questions it has raised need careful consideration.

The American citizen is today stuck with two problems. On one hand he is carrying huge levels of personal debt due to a lifetime of indulgence in credit backed by the rising real estate prices, and now finds himself unable to pay off the loan. On the other, as a citizen, the taxpayer carries a burden of repaying the national debt which has doubled in the last two years, just as government spending costs on healthcare and other necessities are set to rise substantially.

The result of this conflict is likely to be increased tensions within the government on how to control and manage spending, where the funds to pay off the short term debt will come from, and in what proportion money can be spent on the older generation of baby boomers who are now hitting retirement and will need increased government support for social support and healthcare.

The only reason the Fed has so far succeeded is mainly due to the fact that Treasury bonds are seen by many as a safe investment. As long as the recession lasts, investors are likely to buy and hold these bonds. But once the recession is over, they would want to move their investments to other more lucrative markets and the government will have to redeem the bonds. Right now, the government does not have the money to do so. Hence, there has been an effort to shift borrowing from the short term treasury bonds to longer ten year and thirty year bonds which yield higher interest rates for the investor but take away the burden of having to repay nearly $1.9 trillion within the next year.

To top it all, the federal support programs are winding down, meaning that if interest rates rise due to the slower movement of money in the system, the government could see its interest payment commitments go up by as much as $40 billion for every half percentage point. And then the government would find itself in exactly the same position the financial institutions were when the crisis happened.