The national debt, which currently stands at around $14 trillion, is an accumulation of all past deficits and surpluses. Essentially, the United States has borrowed $14 trillion more than it has received via taxes. This staggering number has Congressman screaming fire on the top of the Capitol building.
But have you ever stopped to wonder... why that is?
Despite common belief, debt incurred by businesses, government, and households is not a bad thing! To put it into a micro perspective, most households take out loans in order to finance cars, homes, and an education. Most American employees do not have a couple hundred thousand of dollars lying around to purchases.
The same concept applies to the United States government, but on a larger scale. In order to increase the standard Japan have ratios of 102% and 225% respectively. The last time i checked, Japan and Singapore are still thriving economically.
The amount of debt, although staggering in size, should not cause alarm or panic by itself. However,w hat most economists and educated politicians are concerned with is the rate of growth of the National Debt. This concern deals with a though economic concept that can be explained using another simple micro example.
If Mr. and Mrs. Johnson try to purchase a home, they must first find a bank to offer them a mortgage. If the wedded couple has a large, overdue balance, the bank will not give the Johnson's a loan. The bank lacks confidence that the Johnson family will repay back their loan in a timely manner; and thus, refuse to offer a loan.
If domestic and foreign institutions view investing in the United States as a financial risk due to the large amount of unpaid natioanl debt, thsi could be a serious problem. However, the current $14 trillion debt level has not scared off investors so far. The national debt level could double in amount, but the key to maintaining a stable economy is the confidence level investors hold in the United States. If the United States cannot borrow money then the economy risks flat lining into cardiac arrest- similar to what happened in Greece.
In order to curb the U.S. from bankruptcy, Congress should focus on maintaining a manageable rate of national debt. It would be counterproductive to pay off the entire $14 trillion debt in a relatively short amount of time. However, if spending continues to increase without a proportionate increase in taxes, the economy could be treading in deep, risky water. American and foreign institutions will eventually refuse to loan the U.S. government loans if the institutions believe that their loans will not be repaid in a realistic timetable.
The majority of economists agree that a GDP to debt ratio of approximately 67% should be the goal of fiscal policy makers, Taking this figure into account, the long-term goal for Congress would be to reduce the national debt by about $4 trillion while keeping GDP constant. This feat could easily be accomplished, especially since the U.S. continues to crawl its way out of the Great Recession.
Still not convinced that the national debt may be overblown? The majority of politicians also fail to mention that foreign institutions must reinvest profits earned from loans right back into the American economy. China cannot take American dollars, earned from interest from loans, and convert the currency into Yuan. The profits earned either must be saved in American banks or must be used to purchase more American bonds or capital goods.
The national debt makes front-page headlines in nearly every major newspaper publication. Granted, if left untouched, the national debt could ruin the U.S. economy; but at this point, the concerns of the U.S. economy of deteriorating are overblown. As long as foreign and domestic investors continue to believe that U.S. can pay off their loans, our children and grandchildren will not have to worry about paying off trillions of dollars
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