USA is now underwater with debt - and there's a lot more to come

The national credit card bill is now projected to be bigger than our annual income. Federal Reserve Chairman Jerome Powell warned this week that the federal budget is unsustainable. But he also warned, "now is not the time to give priority to those concerns."

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Highlights

By Marshall Connolly (NEWS CONSORTIUM)
10/8/2020 (4 years ago)

Published in Business & Economics

Keywords: debt, U.S., economy, COVID

LOS ANGELES, CA (California Network) - The federal budget continues to accrue debt at an unsustainable rate. Even though interest on federal debt is low, so much debt is accruing that it is becoming unsustainable. One way to think of it is of a household allowed to borrow money at near-zero interest. If that household borrows stupendous sums of money, it will eventually reach a point where even the low interest debt will become impossible to repay. 

If investors develop meaningful concerns that the USA cannot honor its debts, then the nation's credit rating will fall and it will become ever-more difficult for the nation to meet its obligations. Austerity will be required which means strongly curtailed government spending. That means fewer benefits and services. And while that might not sound like such a bad idea, it would manifest itself in decaying infrastructure, slower services, including emergency services, a smaller military, and smaller payments for those in need. Unemployment and poverty will spike, and government will not be able to bail out businesses or households. 

This is what's coming if the nation's debt cannot be controlled. However, as bad as it sounds, doing nothing is a greater danger. Without additional aid from the federal government, we could be on the verge of a complete collapse of the US economy and the dollar. Such a crisis could render the government impotent and result in civil unrest and the collapse of our Republic. 

This is why even though the crisis is severe, Powell is advising officials not to worry about accruing more debt. 

This analogy of a household is fair to some degree, but it falls apart at a certain point. Specifically, the United States issues its own money. A household cannot do such a thing. This power allows the government to employ special measures to keep itself afloat and solvent, even in cases as extreme as these. 

A new analogy is needed. In this case, imagine a different household where the parents reward their children for doing chores by passing out business cards as a form of money. The children in the house pay for what they consume and the privileges they want using these cards. For example, washing the dishes would result in a payment. Buying a new outfit would come at a cost. 

In this hypothetical household, the parents issue the currency and can always print more. Like the bank in "Monopoly," they never go broke. And since payments and prices can be adjusted, the number of cards circulating in the house can be managed. Likewise, the Federal Reserve can use fiscal policy interest rates, bonds, taxes and the ability to issue currency prevent out of control inflation and arrest recession. 

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In addition, the federal government can restructure and refinance debt by various means. This is a reasonable strategy as long as the debt accrued now will be covered by greater income later. As long as the economy grows, the scheme works. However, too long a period of contraction will cause collapse. 

Right now, the Trump administration has put a stop to stimulus talks, at least until November. But this is a dangerous move with nearly half of all American households unable to pay rent or mortgages. And without money to spend, combined with a closed economy due to COVID, millions of businesses are in some state of collapse. Even large industries, such as airlines are on the verge of collapse. 

In the short term, massive stimulus is needed to keep Americans housed and businesses open. An easing of COVID restrictions may also help, but millions of people who feel they are vulnerable to COVID remain likely to stay home from work and shopping. It's simply a consequence of the situation. 

For now, our economic focus needs to be on short-term survival. Once the COVID crisis has ended, sometime in 2021, hopefully, we can work on ways to repay the debt and manage our economic future. But Powell is right. if we do not open the financial taps now, there will be no economy and no nation to be worried about later.