The Future of the United States Debt and its Possible Consequences on the American Dream

One of the debates that has been going recently is the future of the United States debt, especially, after the U.S. government committed huge amounts of money in order to help promote economic growth through several fiscal stimulus measures, which left the U.S. with huge national debt levels and a swelling budget deficit, and that left many analysts around the world wondering if the United States government will ever go bankrupt?

The subject is rather huge, and as a matter of a fact, I don’t intend to discuss the matter, as I’m very sure you read or pondered upon many research reports that discussed the very same idea, however, I’m more concerned with the steps that this current government and any other government that will come later need to take in order to prevent the United States from ever going bankrupt, and I think President Obama realizes just how important this issue is in order to make sure that Americans continue to live the American Dream.

The roots of the story go back to the early 2000 and Gorge W. Bush’s obsession with national security, which led the United States to go into two massive wars under the name of fighting terrorism, and those wars, needed huge amounts of money, where it’s estimated that the U.S. spends on both wars around $1 trillion a year.

The total debt has been rising over $500 billion a year since 2003, while more recently and to be more specific in 2008 and 2009, the U.S. total debt increased by $1 trillion and $1.9 trillion respectively. The national debt nearly doubled during the Bush Administration from $5.6 trillion in January 2001 to $10.7 trillion by December 2008, which marked a remarkable rise in total debt as a percentage of GDP from 58% in 2001 to almost 70% by the end of 2008.

Another issue that comes into mind with servicing the debt, is the interest payment on the debt as well, where it was estimated that in FY 2009 and 2010, the interest payment totaled $215 billion, while this number is expected to jump by nearly 30% in FY 2011 to reach nearly $280 billion, and should this continue, interest payments will have quadrupled by 2020 to reach a staggering $840 billion.

The debt held by public is almost 58% of GDP, where public debt doesn’t include money that the government owes itself through borrowing from the social security trust fund; however, the government will eventually need to repay the money it owes, especially when the baby boomers retire, which would add further pressure on the government.

The United States spends nearly as much as $2 billion a week on the war in Iraq, while the total bill for both wars on Iraq and Afghanistan is estimated to have reached $706 billion in FY 2010 which represents nearly 5% of U.S. GDP, as it’s estimated that the U.S. spent as much as $2.34 trillion in Iraq alone over the past eight years, while the war in Afghanistan had cost the U.S. so far nearly a total of $740.billion.

Another alarming issue which continues to increase the total debt, is the rising costs for healthcare, Medicaid, and Medicare in the United States, even though 15% of the population in the United States are not insured and nearly 35% are underinsured, yet the United States spends more money per person on healthcare than any other country around the globe.

The U.S. spent on healthcare in 2007 nearly $2.26 trillion which represents nearly 16% of GDP, while the figure is expected to rise to reach 19.5% of GDP by 2017, which is the main reason as to why U.S. President Obama has been pushing for health care reform over the past period, since estimates show that the U.S. budget deficit will rise by $1 trillion from 2010 till 2019.

The Congressional Budget Office estimated that Medicare and Medicaid costs would rise from nearly 4% of GDP in 2007 to 12% in 2050 and 19% in 2082, while the Government Accountability Office estimated that the present value of unfunded liability for the programs over the next 75 years would be $32.1 trillion under the current system.

However, one might ask, how is that going to affect Americans and how would that jeopardize the American dream, the answer to that question is rather simple, as the budget deficit continues to grow, and the national debt continues to rise, the value of the U.S. dollar would fall, and accordingly, the debt held by foreign governments including China would be cheaper, despite that this might sound like a good thing, since it would take fewer dollars to repay the debt, however, this would also put huge downside pressures on the U.S. dollar, and accordingly jeopardize the credit rating for the United States by making it subject to possible downgrades, and that would lead lenders to ask for higher interest rates in order to compensate for the added risk, and that’s where the real issue is.

This will also be reflected on the Dollar LIBOR rates, which will increase as a result of the increased risk associated with the U.S. dollar, and that means that credit conditions will tighten, since LIBOR is the rate in which banks lend each others, and rising LIBOR rates means that banks are not welling to lend money, and that will be also reflected onto consumers, as they will struggle to get cheap loans. An example of the effects of the LIBOR rate was indeed demonstrated by banks during the credit crisis, as when LIBOR rates started to rise banks were rather reluctant to lend each others,

One of the most important roles that China plays through purchasing Treasury securities is to provide liquidity into the U.S. financial system, which allows banks to lend their money to Americans in order to buy products and continue to have the same standards of living, and those standards of living are making sure that the U.S. economy continues to grow, since nearly 70% of U.S. GDP is composed from spending.

A recent example that we all saw was the crisis in Greece, where Greece’s debt increased to unprecedented levels which sparked a wave of fear that dominated financial markets and led the Euro to nearly crash, as it dropped severely against major currencies on fears that other European nations might be facing the same fate as Greece, now imagine what would happen if that was the United States!

Several European nations are under scrutiny at the moment, as other than Greece, we have Italy, Spain, and Portugal among many other nations that have been running on large budget deficits that widened their national debt levels, where Greece is now facing a total debt that totals nearly 125% of its GDP, and that of course led the major rating agencies to downgrade Greece’s debt to junk, while other countries in Europe received either credit downgrades or were subject to downside reviews on their credit rating.

The crisis in Europe also affected the LIBOR rates, especially after fears spread in financial markets over the outlook for European banks and their ability to withstand the rising pressures, where the Bank of Spain nationalized a savings bank after it struggled to reach a deal to merge with another bank, and this means added pressure on the government’s deficit, where the bailout is expected to cost nearly 2.7 billion Euros.

This should remind us of the huge bailout plans that were provided to U.S. banks by the U.S. government, and I’m not talking about the TARP money that was handed to the major U.S. banks, since banks already paid that money back with interest, but I’m talking about the bailout plans that were given to Fannie Mae, Freddie Mac, and AIG among many others, since the government committed huge amounts of money to aid those ailing institutions, as they were deemed “too big to fail”, and that the systematic risk that was associated with them should they fail was rather huge, and could have sent the economy into depression. After all, the failure of Lehman Brothers proved to be rather drastic as well, where LIBOR rates surged as a result, while lending nearly came to a halt, since no one was really welling to risk losing their money.

The same could happen to the United States, though over the short term the U.S. is still running a reasonable national debt level, compared to other industrialized nations including Japan and the United Kingdome.

The consequences though would be rather drastic should the United States government continue over the same rate of spending, and that might put the U.S. eventually in a similar situation that Greece is experiencing at the moment.

So is the United States really facing this gloomy future? And if so, should the United States continue to spend unwisely and eventually lead the world’s most powerful country to what might prove to be a drastic end? Is there something that can be done in order to avoid this? What would be the consequences on Americans and their American Dream?

The answer to the first question is yes indeed, if the United States government continues to spend huge amounts of money on rather unneeded wars and an inefficient healthcare system, the eventual result would be bankruptcy, and that will lead to a downgrade in the credit rating for the United States, which means investors will be asking for higher interest rates on U.S. Treasuries, which are known to be risk free instruments!

The rising level of national debt would put higher pressure on the U.S. government, as the U.S. would have to pay higher interest payments on the debt each passing year, in addition to its already existing mandatory spending, and that only means that the national debt level will continue to rise if nothing changes, meaning the U.S. dollar will become under pressure, since the government will be printing more money, meanwhile, foreign creditors will start to ask for higher interest rates on U.S. Treasuries in order to compensate for the risk that their holdings of U.S. debt instruments might lose value (Crowding Out Effect).

Now the U.S. government will face a very tough decision in order to reduce its budget deficit, where the answer will probably be a combination of reducing spending and increasing taxes, and that will probably reduce real growth over the long term, since higher taxes will mean lower spending by individuals and institutions, and since the government won’t be using the tax revenue to spend back in the economy but rather to service its debt payments, we can assume lower real growth rates. Moreover, companies will be firing their employees in order to reduce their expenses, while cutting back on spending would mean lower level of hiring, and that will lead overall unemployment rates to rise drastically.

The United States depends on the fact that the U.S. dollar is the world’s reserve currency, which is prompting the idea behind U.S. treasuries being risk free investments, since everyone thinks the United States government can never go bankrupt.

Central banks around the globe use the U.S. dollar as part of their reserves in order to diversify their holdings of foreign investments, while part of those investments is denominated by U.S. dollars including holdings of U.S. Treasuries, in which the U.S. government has been using in order to raise money to fund its budget, yet over the course of the worst credit crisis since the Great Depression, which saw the U.S. dollar dropping in value in its early stages against major currencies, some central banks around the globe started to signal the need for a new reserve currency, since the falling value of the U.S. dollar meant that their reserves had also lost value, and that led some central banks around the globe to diversify their reserves, which included investments in gold among many other instruments.

The fact that the U.S. dollar is the world’s reserve currency also means that commodities are also priced in U.S. dollars, which means that the falling value of the U.S. dollar might spark a commodity bubble, since commodities are dollar denominated assets, which implies that should the U.S. dollar depreciate against other major currencies, commodity prices and other dollar denominated assets would rise in a perfect demonstration to purchasing power parity (PPP). The rise in commodity prices which include energy prices and most importantly oil prices, would lead to higher costs of production and that will help in increasing upside risks to inflation,

Under this scenario, economic growth will suffer deeply, since a combination of higher taxes and lower spending accompanied by high inflation levels and elevated unemployment levels would lead the economy to stagflation, and that is the gloomy future that might be facing the U.S. economy, however, the sad thing is that raising taxes and cutting governmental spending must be done in order to make sure that the American Dream continues.

The Federal Reserve Bank right then will be facing a very difficult decision as well, where the Feds either focus on reviving economic growth by lowering interest rates, noting that by doing this they will fuel inflationary pressures over the long term, or the Feds will tighten their monetary policy in order to fight inflation and that means higher interest rates, which means the Feds have to sacrifice economic growth for a long period of time.

America has become controlled by corporations, whether be it financial institutions, insurance companies, or even oil companies. Former President George W. Bush left more misery than people would give him credit for, as beyond the two wars, the swelling budget deficit, and the worst recession since the Great Depression, which was a result of the huge wave of deregulation that Bush tirelessly pushed for, he also left the future of the world’s most powerful country to corporations and their lobbies in the Washington.

So the end result dear reader, is that if you are an American you can kiss your American Dream Goodbye if things continue over the same rate, and I believe that the U.S. will eventually have to accept lower real growth levels in order to be able to survive the future, and the solution should start right now rather than later, as the United States needs to make some brave decisions including cutting the budget for war, fixing the healthcare system in an efficient way because I don’t believe the healthcare reform will have a drastic effect on the deficit under its current form, and also support green energy, since in case commodity prices start to rise drastically, the U.S. won’t be heavily dependant on oil for production, and that is exactly what Obama has been trying to do, however, it’s a real shame that few only see the bigger picture including the Democrats, since you would expect the Republicans to make Obama sound like a demon to the American public, and that is leaving Obama struggling with the bureaucracy of Washington.

President Obama pledged to withdraw all U.S. troops from Iraq by 2011, where Obama’s plan includes the withdrawal of nearly 100,000 troops by August 2010, leaving nearly 35,000 to 50,000 troops to train Iraqi security forces, and the remaining troop whom were described as “transitional forces” are also expected to leave by 2011. This step should also help the United States budget, since it would reduce some costs, though some of the troops will be heading to Afghanistan, however, until the United States end its war in both countries, we should expect the United States to continue to spend huge amounts of money, while I think we should all hope that we don’t see another “War President” like Mr. Bush, and I support Obama’s stance on foreign affairs, as he has been trying to push for peace rather than war, where he’s trying to improve America’s ill perceived image over the last eight years all around the globe, thanks again to George W, Bush.

However, this might prove to be difficult, though President Obama is indeed trying at the moment, especially with the ongoing tensions in the Middle East, where on one hand, you have the never ending conflict between Israelis and Palestinians, and on the other hand, you have Iran, which is continuing to disregard international calls for transparency concerning its nuclear program, however, we should thank god that Mr. Bush is out of the White House, otherwise he might have started a war on Iran just for the fun of it, plus of course the huge reserves of oil that Iran has, which can only mean more money to Mr. Bush and his friends.

The Healthcare reform bill passed by the Congress is estimated to cost nearly $940 billion over the next ten years, but it’s also estimated to save $1.3 trillion over the next 20 years, though the bill was heavily altered, yet with the Senates’ elections coming this November, some Democrats were rather concerned that they won’t be elected if they passed the original bill, which would have saved a lot more money. Nevertheless, healthcare reform was needed, and even the current bill marks an improvement, though I still don’t think it’s enough and that a public option was needed in order to make the bill more efficient, since it would have reduced costs of Healthcare, Medicaid, and Medicare.

As for green energy, President Obama has been also pushing for reducing America’s dependency on oil, where Obama highlighted the need for an energy policy that has a secure source, while also being able to improve public health, and being friendly to the environment, moreover, Obama’s plan would help in new creating jobs, through investing more in renewable energy, where Obama’s plan to use renewable energy is estimated to be able to supply 10% of the country’s electricity by 2012, while also being able to supply 25% of the U.S. electricity by 2025.

Obama’s “New Energy for America” plan is estimated to cost nearly $150 billion over the next ten years, however, it will be able to save America a lot more in the future. The Obama Administration is also trying to encourage Americans to use renewable fuel for transportation, and this indeed has encouraged carmakers around the globe to start producing green energy vehicles.

A lot of people might disagree with what the Obama Administration has been doing, however, Obama promised with change, a change that will insure Americans a better future, where on a personal level, I’m positively sure that I would rather have my country spend my tax money on making me and everyone else around me healthier rather than use the money to kill other people abroad including our own soldiers.

When Obama first came to the White House he gave some big promises, and they were all focused on our issue here, which is making sure that the American Dream continues, however, Obama seems to have forgot that he was once a Senate and that it took more than just “charisma” to get things done in Washington, and that Mr. President is where you need to fight, because leaving this to bureaucracy means the American Dream will die…