All countries flirt with a national deficit at one time or another.
But the USA, with more than $21 trillion in debt as of March 2018, is having a relationship
with debt so close they’re practically in bed together.
This mega figure is greater than its economic output (1-7% of GDP) and, yes, it seems to
keep on rising as a general trend.
But how did the debt grow that high?
And is there any way to bring the balance sheet back to zero?
Why do countries get themselves into debt, and what are the methods for paying off the
deficit?
Today we take a look at the events leading up to the accumulation of this gigantic debt,
and we determine if there is any way for the US to turn this massive deficit around, in
this episode of the infographics show - What if the US Paid off its Debt?
Debt is created by either excessive spending or deep tax cuts.
Sometimes tax cuts are justified in order to spur the economy out of a recession.
In 1939 the US debt was at $40 billion and by the end of the Second World War this rose
to $271 billion.
After some fluctuations it was still at $271 billion in 1957.
But by 1977 it had risen to $699 billion.
The US has a long and rich history of spending heavily on military.
Since the nation’s existence since 1776 it has spent 225 years at war and just 21
years in peace.
That’s 94% of the countries time at war and just 6% at peace.
US debt spiked after the 9/11 attacks when America increased military spending to launch
its well organized War on Terror campaign.
Between 2001 and 2017 the War on Terror cost $1.9 trillion dollars, so it appears that
much of the US debt is incurred by massive spending in an aggressive defense policy over
a long sustained period of time.
While some argue that jobs would be lost by a reduced expenditure on defense a counter
argument is that other industries could be created.
Other factors, besides war, contributing to the rise in debt include the $24.7 billion
hurricane Katrina disaster and a $350 billion bank bailout.
The current financial situation is, however you look at it, a bit of a mess.
The country hasn’t always been broke.
In January of 1835, the US government succeeded in paying off its entire national debt – in
full for the first time in its history – but slipped back into the red again shortly thereafter.
In the January of 1836 the national debt was sitting at a comparatively tiny $37,000.
From then on the American debt fluctuated a bit for several years but remained relatively
low until around 1863.
Shortly after 1948 America began to pay down the massive debt incurred in the 1930s and
1940s but shortly after 1982 the debt began to build.
From 1992 to 2000 the debt began to be paid back again only for that huge spike after
2001, and 2008, and the rest as they say, is history.
So just what is national debt?
Government debt is money that has not been raised by taxes and has been spent on goods
and services.
This money has been borrowed.
When a government runs a budget deficit it costs them more to administer the country
than it receives in revenue.
To make good this shortfall the government has two choices.
1 – It prints more money or 2 – It borrows more money.
Although printing more money sounds simple enough to do, doing so would lead to galloping
or hyperinflation.
Galloping inflation is when the price of goods and service rise more than 10 percent per
month and hyperinflation is when the price of services or goods rise more than 50 percent
in a month.
To print and distribute more money leads to inflation if there is no corresponding economic
growth to justify the surplus cash.
Instead governments issue bonds that investors invest in.
The government then gets the money from the investors and the investors receive an interest
on the funds borrowed over a period of time.
Just over half of the current $21 trillion US debt is owed to US investors with the remainder
half owed to investors outside the United States.
The more the debt grows the more is spent on interest repayments and less is allocated
to what the government should really be doing with taxpayers money – investing in local
public services.
Over time governments risk running into bankruptcy and seeing their economy collapsing.
The US has declared itself bankrupt five times since its formation.
Once when it could not meet foreign debts, and 4 times due to internal debts.
The first time the US became bankrupt was in 1790 and the last occasion was in 1933.
But America is not alone.
A total of 83 countries have become bankrupt in the last 200 years.
Debt can be reduced in one of two ways.
Debt is forgiven or debt is paid back.
Most of the people, countries, and organizations who are owed money by the States are unlikely
to forgive the debt so the US will probably have to pay it back at some point if it is
to reduce the deficit to zero.
For a government to start paying back its debt it will need to spend less than it earns
or receives in taxation and run a budget surplus.
Seems simple enough, but the problem is that society becomes accustomed to the level of
government spending especially if they directly benefit from it.
Nobody wants to give up what they already have and nobody wants to pay more taxes.
Society in general wouldn’t wish to see a cut in spending on healthcare, schools,
and other essential services.
Cutting back on spending leads to less votes, and a loss of power to the next politician
who promises more spending.
This is how the problem escalates.
So if the American government somehow paid back its debt then the taxpayer would see
more of their tax dollars spent on local government services and less of that dollar paid back
to investors in interest.
The overall standard of living should also rise for most Americans.
Voters would need to accept short term financial pain for long term gain.
But with the American political system set up as it is, a new president could come along
and put all of those good years to waste in a manic spending frenzy.
It has happened in the past and will probably happen again in the unlikely event that America
managed to reduce its debt to zero.
But who could pay off this rising national debt?
Really you have two choices.
The lower and middle class taxpayers could pay off the debt through tax increases or
by inflation or the big business monopolies, high class politicians and corporations could
settle it through targeted taxation.
Of course politicians are like everybody else.
They don’t want to pay taxes and they don’t want the corporations, lobbyists, and high
net worth individuals who put them where they are to pay taxes either.
To heavily tax the poor normally leads to sharp rises in inflation and a shrinking economy
which is bad for everyone.
Paying the debt in full today wouldn’t actually make too much of a difference in the economy
itself but it would speak volumes for US creditworthiness should a crisis such as the 2008 financial
crisis occur once more.
So what would happen if the US paid off all of its debt?
The simple answer is – not much.
The country would function as it does now and will probably put in action plans to increase
its debts once again.
Countries function normally while in debt as long as the debt is kept to a manageable
level and it keeps up with its repayments.
So what do you think about the US Debt?
Should it be paid off and if so who should do the paying?
Do countries really function better when they are in debt?
Let us know your thoughts in the comments.
Also, be sure to watch our other video called Japan’s Population Problem.
Thanks for watching, and as always, don't forget to like, share and subscribe, see you
next time!