2/20/2009

The Inflating National Debt: Threat to U.S.?

With the passage of the recent American Recovery and Reinvestment Act of 2009 the annual budget deficit took another dramatic leap for the 2009 fiscal year. The deficit was originally projected at $1.2 Trillion dollars, but with the addition of the Stimulus Bill that figure has nearly doubled to a staggering $2 Trillion dollars. This giant deficit will most assuredly add to the already-massive National Debt which is already in the ballpark of $11 Trillion or 60% of GDP. Some fear this consistently increasing number threatens the solvency and sovereignty of the United States of America as a political state. Is this a reasonable concern? Is the solvency of the Republic in danger? The answer is no, the current debt is not a viable threat to the solvency of the state. Though we do not wish to advocate deficit spending, the fact of the matter is that the United States has faced budget deficits and national debt before. The current debt represents approximately 75% of U.S. GDP, yet has been much worse in the past. For example, post World War II the debt reached 130% of GDP. The U.S. debt fares pretty well in comparison to other countries as well, it ranks 23rd in National Public Debt. Japan by comparison, ranked 3rd, has a debt that is an unbelievable 170% of GDP. As outstanding the debt may be, the simple fact remains that no creditor is bold enough to call in American debt. This would only spur a chain reaction in which the U.S., and every subsequent country, would also call in their outstanding loans and the world’s financial system would be left in ruin. No country or creditor would dare inflict such chaos, thus no matter the size of the U.S. National Debt, the solvency of the United States will remain intact. That’s the blessing of being the world’s economic superpower.



"A Short History of the National Debt" By JOHN STEELE GORDON

http://online.wsj.com/article/SB123491373049303821.html?mod=article-outset-box

2 comments:

Dr. Tufte said...

There are frequently speculations about what would happen if the U.S. national debt was "called".

Here again, we get to the issue of centralization vs. decentralization.

The situations where this has happened - with individuals, corporations or other countries - always involves a small number of debtholders, often just one. The backstory to these situations is that the entity couldn't get anyone to loan them money in a decentralized way, finally got one lender to lend them the whole thing, and then got into trouble and had that one lender want their money back.

In the case of the contemporary U.S., our national debt is held by millions of investors. There simply isn't any way for them to coordinate this sort of endeavor.

Believe it or not, this actually makes the risk of lending to the U.S. lower. To see why, consider if there were two lenders only. If the one called in their loans, what would happen to the value of the loans that the other party is counting as assets on their balance sheet? It would tumble! So, the risk to lenders and borrowers is actually reduced when the borrowing is spread out.

Probable Error of Opinion: The estimates are that the stimulus package won't add the full $800 B to the deficit (at least this year).

Error of Fact: that national debt is not ever increasing.

Anonymous said...

I don't wish to suggest any similarities other than the amount of investors/creditors each nation has/had but the German situation at the end of WWII came to mind. Germany facing enormous debt and raising costs near the end of the war printed vast amounts of currency to relinquish their debts. Hyper-inflation ensued followed by a complete melt-down of the German Marc. I was just wondering if the same might disaster might be possible with the American Debt. After all, both had a large amount of investors/creditors right?