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The US on the verge of global economic crisis: National debt exceeded the size of the US economy

The US on the verge of global economic crisis: National debt exceeded the size of the US economy

The US national debt of $23 trillion has already exceeded the size of the American economy, which is fraught with future generations a financial burden that is 10 times higher than today's debt burden. Never before in its history has a country experienced such a high level of deficit and debt in a period of relative peace and economic prosperity.

About it writes The National Interest.

Do you remember the last time the budget deficit reached $1 trillion? It was in 2012, and then the country was just beginning to get out of the most serious recession in the last few decades. Now fast-forward to today. The US Congressional Budget Office — a reliable Washington fiscal controller — expects the federal government to reach the trillion-dollar mark this year. There is nothing good about it.

In fact, the situation is dangerous. National debt of $23 trillion has already exceeded the size of the American economy. This year’s deficit will only add even more gas to a fiscal fire already engulfed in fire.

The situation, in fact, is much worse than most people think. In this amount of $23 trillion, significant US dollars are not taken into account and financed by the obligations of the US government with programs such as social insurance and Medicare national health insurance. The so-called fiscal gap, which reflects the difference between estimated income and expenses over a long period, threatens future generations with a financial burden, which is 10 times higher than today's debt burden.

All this happens at a time when America is experiencing one of the longest periods of economic growth in the history of the country, while unemployment is at its lowest level in recent years, wages increase (especially among low-income people), and the economy continues to grow and expand, despite the winds blowing right in the face.

This is precisely the problem. Never before in its history has a country experienced such a high level of deficit and debt in a period of relative peace and economic prosperity.

In the 1960s, the economist Milton Friedman not without irony remarked: “Today we are all Keynesian.” However, even John Maynard Keynes would not support deficit spending today. Keynes believed that governments should accumulate additional income during a period of rapid growth in order to they can successfully cope with business reduction cycles, and they should not increase government spending in any economic cycle, because otherwise there will be a financial collapse.

The US Congressional Budget Office is prone to focusing on another indicator of the current debt burden — government debt. In this case, we are talking exclusively about borrowing in the credit market, but it does not take into account domestic obligations — such as payments for social insurance, military veterans and the like.

However, programs targeted at the elderly, such as social insurance and the national health insurance program, as well as pensions and other health care expenses, are the drivers of unsecured funds. All of these payments are growing faster than the ability to work in America to finance them. Rising disbursements represent America’s main driver of deficits and debts.

No matter how you twist these numbers, they all talk about one thing. The fiscal situation in the United States is extremely volatile and indicates an approaching fiscal crisis.

By 2050, debt received on the credit market will reach 180% of gross domestic product (GDP). This is much more than what was already in the history of the United States, but the growth of debt obligations will not stop there. Greece faced a debt crisis when its debts reached the same level of 180%. The question is, who will provide financial assistance to the United States?

However, a full-blown fiscal crisis is not the only problem that should cause us concern.

When federal debt is so large and continues to increase, problems arise with rising incomes, and as a result, we become poorer. In such a situation, interest payments increase, and those funds that were assigned to other priorities go for it. In addition, increasing pressure on interest rates throughout the economy, including mortgage and car loans. As a result, the ability of our state to respond appropriately to the next recession or extraordinary circumstances is weakening, since there is too little fiscal space at a time when this is especially necessary. And in this situation, an unjust burden is placed on future generations, and this could strike the American Dream.

Washington’s squandering and lack of fiscal responsibility would be credible, also threatens the country's valuable status as a supplier of the world's main reserve currency — the US dollar. Although financial markets do not yet show signs of concern, they may underestimate the real risks of not having acceptable alternatives and continue to invest in relatively safe assets.

An article by a group of authors led by Leonard E. Berman, published in the National Tax Journal in 2010, emphasizes that the global market for government securities can, by its nature, be created for the winner, who gets everything, but as a result, a bubble can form with unexpected and serious consequences for interest rates in the event that the bubble bursts.

“One of the behaviors leading to the formation of a bubble may arise when reliable investments (currently US Treasury securities) can provide an almost unlimited flow of cheap capital, while the next safest investment option will be traded at a significant premium for risk: Volatility in the global market, even if it makes the United States Treasury bonds less reliable, further increases the risk premium — as a result, the capital flow in the United States and even more pressure on interest rates, this can explain the sharp decline in income from US securities even at a time when the US financial sector was on the verge of collapse, and the economy was in danger of a deep recession, and all this could correspond to a further decrease in interest rates in the United States at a time when Greece and other eurozone countries were faced with a debt crisis.“

Washington is playing with fire.

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