The U.S. Debt Crisis

Debt hysteria is the best terminology that can be used to describe what’s going on. It feels like the world will end when you hear headlines saying the USA is going to run out of money by the end of October, USA debt is larger than its economy, etc., which conflates things. Firstly, it’s not a debt too large issue but rather a debt ceiling issue. The USA spends a greater amount of money than it earns from streams, such as taxes, tariffs etc. To cover for such shortfall, it borrows money. In the 1900s, Congress established a debt ceiling to set limits; however, the ceiling has been lifted a hundred times (recently by the Trump administration).

The issue here isn’t the debt is too large. There has been a fiscal paradigm shift whereby modern economists such as Blanchard, Summers, Furman, Bernanke, Rogoff explain that public debt isn’t a major problem, as long as money is borrowed for the right purposes such as infrastructure spending, health care, education and other foundational things that are key for a thriving nation. Secondly, due to low-interest rates, cost of borrowing isn’t what it used to be. An indicator used which is the Long-Term Government Bond Yields: 10-year, shows that in the past decade interest rates has been below 2% whilst in 1990 it varied from 8-4%. As such it’s cheaper to borrow now than in the past. The issue here is politicians love for theatrics.

Paul Krugman best summarizes the Republicans’ view of debt, “The party considers high levels of debt an existential threat— if a Democrat is sitting in the White House. If a Republican president presides over big deficits, well, as Donald Trump’s budget director reportedly told supporters last year, ‘nobody cares’”. The same thing happened before where they made a hysteria about Obama raising the debt ceiling, but when Trump did it, it’s fine. Republicans are making this hysteria as they see Biden spending plan (to invest in infrastructure, education, environmental policy, etc.) as reckless and that it goes against the principles of the ‘free markets’.

As we’ve recently seen, the debt ceiling was raised to afford spending till the third of December. My prediction is that the same hysteria will happen till a week before December where the ceiling will be raised again; they will try to push this agenda of portraying the Democrats as reckless spenders etc., for political gains. The problem never lies with society laziness, immigrants or the other things politicians like to blame it on, but it’s always to do with politicians and their love for theatrics. In conclusion there is nothing to worry about except if Republicans don’t raise the debt ceiling which I highly doubt.