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National Debt

Few economists, if any, doubt the looming problem that awaits the U.S government. The

increasing demands on its national budget do not seem to ease the situation. Rather, expenses

such as Medicare only seem to widen the magnitude of the fiscal disparity. So far, the U.S may

have been the best student of Adam Smith in taking foreign debt to supplement its budget deficit.

While this may not have any significant implications of the present generations, future American

are faced by an uncertain future marred by the short run and long run effects of this debt (Bertaut

et al 56). One may argue that a country, unlike an individual, cannot be confronted by instances

of bankruptcy, or be held hostage for its inability to pay its debts; still the U.S. Government

needs to re-evaluate its policies to avert future consequences. This paper evaluates the possible

short run and long run effects of present debt situation.

Presently the American debt is running into trillions of Dollars with its main financier

being the Chinese government. Two firewalls are what shield the financial structure from

crumbling. First, the treasury debt is funded by the minor insurance programs such as Medicare

which give the impression that the unstable financial situation of social insurance is not of any

consequence to the present standing of national debt. However, projections indicate that the

insurance finds are bound to run dry by 2036 (Constitutions, Corporations, and Corruption 215).

When this happened the available funds collected from taxes will be insufficient to meet the

budgetary needs resulting in the eradication of this firewall.

The second financial shield is the countries strong currency and the ability to secure debt

from other nations. The United States government if confronted by two situations, it can opt to

pursue the Zimbabwe way of calling on the Federal Reserve to issue more currency, and face the

risks of devaluing its currency, or it can default on its present debt and withhold the strength of

the currency. Of course, the U. S government would opt to take the path followed by Russian in

1998 of clearly debts partially in order to ensure its currency is steady. However, there would be

consequences for this decision.

Short run and long run effects

An increasing level of federal debt has the ability to dwindle investor’s confidence in the

government ability to keep its budget within its control. Consequently, the government stands the

chance of losing its debt acquisition ability as many of the investors feel they there is a high

chance of defaulting. If it does secure loans, it will do so at extremely high interest rate, a fete

that only worsens its present situation (Hummel et al 46). There is also the chance that the

interest rates would change gradually; allowing more time to the policy makers to pass policies

that would eventually changes the course of events. In this case the investors would still lend the

funding to the government at considerably reduced interest rates.

However, if other countries’ experience is anything to go by, the United State

government may not have the grace period to adjust its policies. Investor confidence could shift

immediately. Should such a case occur, the government would be forced to acquire funds at

extremely high interest rates. However, attaining such a point for the United States government

remains indeterminate especially due to the peculiar ratio between the national debt and the

nation’s Gross Domestic Product. Presently, the federal debt stands at ninety seven percent of the

country’s GDP. Several factors have contributed to this present standing. Among them is the
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government’s long-term budget viewpoint, its near-term borrowing wants and partially due to the

unstable health of the economy.

Given the recent economic crisis, there is the chance that investors feels the U.S can

undergo a fiscal crisis. Experience indicates that a fiscal crisis often occurs when an economy is

ailing giving the Federal Reserve a hard time instituting fiscal policies to restore the economy

back on its feet (Congressional Budget Office 67). If that be the case, a sharp change in the

interest rates on the funds from the investors could be due to their fears that the government

could go back on its promises on regarding its debt. Alternatively, investors could fear that the

government may boost the supply of money in the economy in an attempt to pay up its creditors.

This could in turns lead to inflation. To avert such an incident, the policy makers would have to

instate alternative but more stringent policies such a tax increases and implement spending cuts.

This could restore investor confidence and control the rise in the interest rates (Hummel et al.

28). However, they would gravely affect the people since they would earn less but spend more

Suggestion for correct the debt crisis

The above details only paint a bleak picture of the present economic situation in America.

The situation may be much worse. So the question that begs for an answer is how this crisis can

be averted. Here are a few suggestions of a number of alternatives that can be sought.

First, America is a huge donor in the eyes of many nations, especially in Africa. Millions

of shillings are used to fund donor production other countries while the nations carries a huge

burden of federal debt. American should possibly put a hold on donor projects and instead use

these funds to offset its al already huge debts (Financial Management Service 19). Secondly, the

nation is spending millions educating the non-citizens, a fete that should stop since it presently

cannot afford. Currently, the country can barely take care of its citizens let alone cater for the
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needs of illegal immigrants. If these funds were channeled to payment foreign debt, the country

would be way ahead in offsetting the huge figures.

Thirdly, the government often has the economic reasons of bailing out failing financial

institutions. If significant funds are to be set apart for clearing of this debt, the federal

government has to ensure it there are no funds set aside to bail out such institutions. If a

company is sinking, it should be allowed to maneuver its way up not depending on the help of

the government to revive itself. Finally, the government should consider cutting down its

spending especially on the remuneration of the elected officials (Krugman et al 34)

Definitely, America’s national debt is a thing that should get every American worried.

Each year, the nation seems to accumulate more and more debt from countries such as China.

Just as Adam Smith, said the modern American does not have to worry about the debt; his sons

and grandsons will find way to repay. I think that time is slowly catching up. The generations he

spoke about are the present day Americans. Therefore, they must come up with a solution to

counter this debt issue of forever risk the chance of facing the consequences described.
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Works Cited

Bertaut, Carol and Ralph, Tryon. Monthly Estimates of U.S. Cross-Border Securities

Positions.International Finance Discussion Papers 910. Board

of Governors of the Federal Reserve System (Washington, D.C.), 2007.

Congressional Budget Office. CBO’s 2011 Long-Term Budget Outlook, eds.

Christine Bogusz, et al. Washington, D.C.: Congressional Budget Office, 2011.

Financial Management Service, Department of the Treasury. Financial

Report of the United States Government. Washington, D.C.: U.S. Government

Printing Office, 2010.

Hummel, Jeffrey Rogers. Government’s Diminishing Benefits from

Inflation. The Freeman 60(2010): 25-29.

Krugman, Paul. Debt and Transfiguration. New York Times. The Conscience

of a Liberal, March 12, 2010a

Hummel, Jeffrey Rogers. Death and Taxes, Including Inflation: The Public

versus Economists. Econ Journal Watch, 4(2007): 4 Wallis, John Joseph. 2005.

Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842

to 1852. Journal of Economic History 65(1): 212-59.