American Debt Crisis

The reasons for America large debt are numerous ranging from an aging population, tax cuts, low interest rates and recently the coronavirus pandemic.

The United States is the most indebted nation in the world. Clearly, the

United States debt can be seen as a big problem.

United States which is also the wealthiest nation on Earth, how did it become the most indebted nation?

In this article, I will be analyzing the history of the U.S. debt.

But first, I want to clarify some terminology and many beginners ask the question what is debt anyway?

Debt

Debt is defined as an obligation that requires one party, the debtor, to pay money back to the creditor over a set period of time with an interest rate. For instance, if an individual wants to purchase a home they will usually put a down payment of cash then borrow the rest of the money from a creditor. They will also pay interest on this borrowed money from the creditor which is how creditors make money off loaning money.

The same concept can be applied to the American government system and how they borrow money. Every year congress passes a budget for the next fiscal year. The government budget allocates money towards what the government will spend money on for the following year. The government is able to raise revenue to fund its programs through taxes. However, when the government ends up spending more money than it raises to fund its budget, this creates what is known as a budget deficit.

When a government enters a budget deficit, they must borrow money from a creditor, in this case, they need help from private banks or foreign governments, in order to raise the extra money needed to fund its budget. This borrowed money then becomes debt.

The United States has been borrowing money for many years to fund its increasing budget, which is why the debt keeps increasing. However, it gets more complicated from here.

There are two main forms of. debt: Intragovernment debt and publicly held debt.

Intragovernment debt is debt that one part of the government owes another part. This debt is mainly accrued through government owned funds. The government will lend the profits it receives from these funds to other parts of the government, thus creating intragovernment debt. Intragovernment debt is used to fund programs such as Social Security.

As of today, intragovernment debt is roughly 5.5 trillion dollars. The other form of debt, known as publicly held debt, represents a much larger portion of the national debt. Today, publicly held debt exceeds 21 trillion dollars and is responsible for the majority of the increase in debt in recent years. Foreign governments, such as China and Japan own roughly 7 trillion dollars worth of publicly held debt, while the Federal Reserve, owns around 10 trillion. Various other entities own the remaining portion of the debt. The United States debt is certainly significant, but it is useful to look at debt from a historical lens to understand how we got to this point.

With analyzing debt throughout history, debt is commonly measured by its percentage of total GDP. For instance, if a nation’s GDP is 500 billion dollars and their debt is 250 billion, then the debt to GDP ratio is 50%. In the United States debt has usually increased during wartime then declined during peacetime. National debt in the United States began during the Revolutionary War, when the government amassed large war debts in order to finance the war. The national debt as of January 1, 1791 was approximately 75 million dollars. On January 8th, 1835 President Andrew Jackson paid off the entire national debt the only time in U.S. history this has occurred.

The American Civil War then skyrocketed the national debt. In 1860, debt was 65 million, but had reached 2.7 billion by the end of the war. During the next 50 years, over half this debt was paid off.

Debt increased again during World War I reaching 25.5 billion dollars by the end of the war. By the 1920s, 36% of this debt had been paid off. Throughout the 1920s, the debt was decreased by 1/3rd. By 1930, public debt was 15 billion dollars or 16% of GDP. During FDRs early years debt had increased to nearly 40% of GDP in order to finance the New Deal programs to combat the Great Depression. However, during World War II debt had risen to over 100% of GDP growing to 243 billion by the end of the war.

Following World War II, the world experienced a post-war economic expansion and the global economy grew especially in the United States throughout the 50s and 60s. In the 1970s the United States experienced stagflation and economic expansion declined. Despite this by 1974, the national debt was just 24% of GDP. However, debt started to rise rapidly again starting in 1980 under the Reagan Administration. Reagan’s fiscal policy lowered tax rates and increased military spending. As a result, debt percentage of GDP increased from 26% in 1980 to 40% in 1988, by the end of his presidency. Debt continued to increase during the presidency of George Bush. By President Clinton’s first term, debt had reached nearly 50% of GDP, but fell to 35% of GDP by the end of Clinton’s presidency. Due to Clinton’s policies of decreasing military spending and increasing income taxes allowed him to achieve a budget surplus by the end of his presidency in 2001, the last budget surplus the United States government has achieved since.

Debt is inherently not bad. Through debt many people are able to purchase a car, a home, or start a business. Without debt, these things would be impossible, as the majority of us could never save up enough money to pay 100% cash for a car or a house. On a macro level, businesses use debt to expand their business, buy real estate, and hire more employees, thus growing the economy. Furthermore, many economists argue that debt is not inherently dangerous as long as it does not generate inflation.