U.S. Debt Is Out of Control, But Economic Collapse Not Likely—For Now
The United States literally can’t afford itself anymore. Each year the U.S. spends hundreds of billions of dollars more than it collects in taxable revenue. Broken promises, political expedience, lack of principle, systemic failures within our government abound. This has become the norm within Washington. A continuous stream of failures flow from the Swamp.
We heard plenty of House and Senate candidates in the recent 2016 election cycle talking about cutting the fat, and addressing this issue—something that isn’t and won’t happen. The federal debt has surpassed $20 trillion and continues to grow. It’s now higher than U.S. GDP, which stands at around $18 trillion. There isn’t a precedent in world history that can demonstrate a case in which a country with a national debt higher than its GDP has fully paid back its debts.
The old adage claiming, “It takes money to make money,” can’t be applied to the situation in the United States today. The bulk of U.S. debt isn’t being used to build highways or bridges. We’re not talking about that kind of debt. Our debt is largely made up of spending on entitlement programs, which provides littler, if any, return on investment.
Yes, There Are Repercussions
When people think of the economy collapsing, they think of dire situations like the stock market crash of 1929 or some other cataclysmic event. Economics is not always so cut and dry, however. Our economy is still suffering from 2008, though it may not feel like it. Here’s why: As previously mentioned, we are borrowing way more than we could ever possibly pay back. A reasonable person must ask him or herself why on Earth any other entity would lend money to the U.S. considering these facts.
After the 2008 crash, the Chinese began to backpedal away from greenbacks, so the U.S. had to figure out where it would get the money needed to pay for the huge amount of expenses politicians keep incurring to bribe the masses for their votes. While there are some foreign lenders and domestic lenders willing to invest in the United States, the main channel through which the U.S. pays these expenditures is through the Federal Reserve.
This is where “quantitative easing” comes into play. Sounds really complex, right? All this means is that the Fed prints off a bunch of bank notes and swaps them for government bonds. Magically, there’s tons of new money to pay for stuff thanks to a printing press. Sound too good to be true? That’s because it is.
Money does not grow on trees, and like you probably are thinking, this isn’t a viable way to run a country’s economy over the long run. The Federal Reserve literally expanded the money supply (effectively printed money) to pay U.S. debts, debasing the currency to buy up atrocious mortgage-backed securities, among other things intended to save us from the effects of the 2008 crash. The thing most people don’t realize is that by doing this, there is an enormous hidden tax in the form of inflation, which reduces the purchasing power of the public in spectacular fashion.
As a rough estimate, the Federal Reserve tripled the money supply and reduced consumers’ purchasing power by one-third of what it previous was. You might be thinking, “Okay, but where is all that inflation you’re talking about?” Some leftist academics and media elites will use the Consumer Price Index (CPI) when calculating inflation, but this is problematic because this method is extremely flawed. For instance, it doesn’t traditionally account for some of the biggest expenses in a consumer’s budget, including rent, insurance, cars, college tuition, etc.—all of which have experienced dramatic price increases since 2008.
Since 2009, the stock market has increased immensely (especially over the past year or so). You’d think that’s a good thing, right? Well it’s great for baby boomers, who have invested in 401ks, IRAs, pension funds, and other investments, but it doesn’t do much for younger people. Price-to-earning ratios have been effectively stagnant, and there hasn’t been enough real economic growth to merit the stock market’s increases. It’s all nothing more than a mirage for many Americans.
U.S. Is Still Top Dog, and It Will Remain That Way
The United States has had the luxury of being the world’s reserve currency since World War II. That has allowed the exportation of a vast amount of inflation to other countries. What this effectively means is that a disproportionate amount of contracts—such as those crafted for oil, for example—are denominated in U.S. dollars, forcing other countries to keep dollars on hand. This offers a unique advantage in that there is always a constant demand for dollars worldwide. If the U.S. currency were used only in America and the spending were to be this out of control, the economy would be in far greater peril than it is now (see Venezuela).
The United States also benefits from the poor decisions made by other economies. While the U.S. has been rather reckless financially, every other country has been exponentially worse. As a result, there is currently no serious threat to the U.S. dollar continuing on as the world’s reserve currency.
Some claim the BRICS (Brazil, Russia, India, China, South Africa) nations will challenge the hegemonic power of the U.S. dollar, but this is extremely unlikely. Yes, it’s true China and Russia are developing a ruble-yuan swap, negotiated between the Russian Central Bank, and the People’s Bank of China. However, the other three BRICS member states (Brazil, India, South Africa) are in a much different situation. All three countries are firmly within the grasp of the IMF-World Bank. They can’t make any changes without the IMF, and thus the United States, signing off. An arrangement that would use national currencies instead of the U.S. dollar or some other global currency would require sovereignty in central bank monetary policy. India, Brazil, and South Africa are effectively U.S. proxy states in the monetary sense, and it would be incredibly difficult for any of them to change their circumstances in the near future.
Additionally, while India has entered into a defense cooperation deal with the Pentagon, which is ostensibly targeted against Russia and China, India remains a large purchaser of U.S. aerospace technology. In fact, India constitutes the largest market for the sale of U.S. weapons systems—all transactions of which are made in U.S. greenbacks. Likewise, Brazil signed a far-reaching defense agreement with America in 2010. It seems unfathomable they could continue with these agreements if they were to ditch the dollar.
Just for arguments sake, even if some coalition was able to put together a challenger to the hegemonic power of the U.S. dollar, do you think the U.S. would sit idly by and have its economy crash, similar to what occurred in 1994 in Mexico, during the 1998 Russian financial crisis, or during the Argentine economic crisis of 1999? No. The U.S. military and economy is much more powerful than virtually every other country in the world, and it wouldn’t tolerate this kind of economic destruction.
Despite all the problems with the United States’ national debt, there are many reasons to believe things could improve soon. Americans elected a competent president in Donald Trump, who is steadily moving the country’s economy in the right direction. We’ve already witnessed notable GDP growth compared to what was experienced during the eight years under Barack Obama. If things continue on this path, and Congress finds a way to bring spending under control, there could be a light at the end of this very dark debt tunnel.
Anthony Fani (full bio here) graduated from The George Washington University cum laude with a bachelor’s degree in political science and history. While in college, Anthony interned with several Republican congressmen and think tanks in Washington, DC.
Editor’s Note: Guest contributions represent a wide array of views and do not necessarily reflect the views of the New Revere Daily Press.