Talking about the US national debt, Admiral Mike Mullen once said: our national debt is our biggest national security threat. How is this domestic debate affecting the life of a regular American? Is the current debt ceiling dilemma affecting the US power? Is this crisis capable to alter other economies?

Here is an important piece of information. In 2000 there was a surplus of 2.4% of GDP and nine years later there was a deficit of 10.1% of GDP (fiscal years). These 9 years were marked by important events like 9/11, two wars in Afghanistan and Iraq and the collapse of Lehman Brothers.



How the budget works

The US national debt is the total amount of money that the US federal government owes to creditors: individuals, businesses, governments and other organizations. In this debate it is very important to understand how is US capable to manipulate its debt. Each country needs a budget for every fiscal year. Imagine the budget as a box. There are two possible things that you can do: you can take money and spend them for healthcare, defense, education or you can add money by collecting taxes. If at the end of the fiscal year you still have some money in your box, then we are talking about a budget surplus. If during the fiscal year you discover that your available financial capital is running low, then you have to borrow money. As a result your debt is increasing. The US is using bonds in order to gain access to money. Bonds are issued by the Treasury Department and we can define this financial instrument as “the process by which an investor loans money to an entity for a defined period of time at a fixed interest rate” (Investopedia). At this moment the US national debt is $16.17 trillion but the important issue here is the existence of a debt ceiling – which is the maximum amount of cash that US can borrow. This debt ceiling was created under the Second Liberty Act of 1917 in order to control the federal government spending. In order to increase the debt ceiling you need the approval of the Congress but as we noticed there are political tensions between Republicans and Democrats especially about the healthcare system.

How is this crisis affecting the economy?

High levels of national debt can induce macroeconomic instability, can decrease the size of the economy by lowering confidence and Foreign Direct Investments. In order to become more attractive for investors the federal government must increase the interest rate of the issued bonds. Increasing the bond interest rate will decrease the amount of money collected from taxes and ultimately this thing generates more debt (so we are practically in a never-ending loop). Moreover high governmental debt can produce inflation. Paying more for goods and services can damage the existing economic stability. If you earn the same amount of money but you have to pay more for the goods/services you need, then the standard of living is going down and the entire economy is suffering. Another result of this deadlock is the partial shutdown of some governmental services from the United States.

Slow economic growth can produce a new recession and we all know that a recession is a job killer phenomenon. Also the interest rate for different loans could skyrocket in the near future.

A long-term consequence of this deadlock is the possible decrease of US power. There are two types of power and both of them need a strong economy. There is hard power measured by the number of tanks, soldiers and bombs that you have and there is soft power which has diplomacy or foreign aid as instruments. For example, a decrease in military spending is affecting the US forces from all over the world, their capacity to operate and their training activities.

US must take immediate action on debt ceiling and that the fiscal battle is a threat to the global economy“. (Bloomberg) The uncertainty created by the deadlock influenced financial markets and increased volatility during the last 5 days. On 12th October the finance leaders from the G-20 said that ““. (Bloomberg) The uncertainty created by the deadlock influenced financial markets and increased volatility during the last 5 days. Let’s take the example of Mexico who is exporting a lot in the United States and because of that the Mexican peso fell to a month-low, while the Brazilian real rallied because the market is expecting cheap dollars from the US markets. This thing happened because only 10 percent of the Brazilian exports are heading towards US. Reputation and influence of the United States are also damaged by this prolonged debate. This dilemma can produce another financial earthquake that is going to hit especially the top holders of the American debt: China, Japan, EU countries (The United Kingdom, Belgium) or Russia.

This crisis seems to be another sign which shows that the international financial system is sick and in need of adjustments. Especially if the Congress does not reach a clear consensus, the future does not look bright and not only for the US but for the entire world.