The debt crisis in the United States
Article added on January 8, 2011
The United States of America has weathered more than one
economic storm in its history. The current one is fundamental, not only for
the survival of the United States as a global player, but also for the sake
of the world economy.
The U.S. federal debt limit, as signed into law by President Obama in
February 2010, is $14.294 trillion. Treasury Secretary Timothy Geithner said
on January 6, 2011 that the country could reach that limit by March 31,
“precipitate a default by the United States,” if the ceiling was not changed.
The total public debt of the United States currently stands at 100% of GDP,
which is higher than in the combined Euro zone, where the largest economy,
Germany, will reach some 85% of GDP in 2011. The U.S.
debt held by the public accounts for some 67% of GDP, with intra-governmental
holdings holding some 32% of GDP.
A decade ago, in 2000, the U.S. federal debt stood at 58%. In 2008, mainly
thanks to George W. Bush's mismanaged wars, it already reached 70% of GDP.
The financial crisis, the
“stimulus packages” and President Obama's
social-democratic agenda made it go through the roof, reaching the mentioned
100% in just two years.
Most politicians around the globe live in a fantasy world, borrowing money
as if there was no tomorrow. In the United States, as recommended by the
Congressional Budget office, the public debt should also include the
obligations of Fannie Mae and Freddie Mac, which have been guaranteed by the
state via the Housing and Economic Recovery Act of 2008. In 2008, the two
government sponsored and now government controlled entities had balance
sheets of some $5 trillion. We don't know the current net worth of those
Incidentally, in 2008,
“Communist” China ($376 billion) as well as Japan ($225 billion) owned important parts of Fannie Mae and
Freddie Mac. The foreign central banks pushed the U.S. government to protect
their interests in the failing mortgage businesses. That may have been the
major reason why the two government sponsored entities have not been
dismembered. In a time of financial crisis, you do not want to mess with
your major creditors.
In addition, China and Japan each own some 20% of US Treasury Securities,
some $820 billion to $850 billion each (July 2010). Furthermore, in 2008,
China held some $1.8 trillion in foreign currency, 70% of which in
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There is more to the American financial crisis. Several
states have amassed colossal public debts and/or deficits, including the
states of California, Illinois,
New Jersey, New York and Texas, to mention just some of the major sinners.
In 2011, the National Conference of State Legislatures estimates the
projected state deficits in California at $19 billion, in Illinois at $15
billion (45% of the state's budget!), in New Jersey at $10.5 billion, in New
York at $9 billion and in Texas at $7.4 billion.
In many states, it is not a revenue, but a spending problem. In
Pennsylvania, the state revenue increased 21% over the past 8 years, while
spending rose 40% in the same period.
In the years of George W. Bush, the GOP lost its fiscal credibility. With
ObamaCare, the stimulus, more pork and increased military spending, the
Democrats showed that fiscal conservatism is not in their genes.
The American citizens are not better than their government. As mentioned in
February 2009, the catch-22 for U.S. citizens is that their
economy is driven by private consumption. But private households have been
living on credit for years and are already largely indebted. A higher
savings rate is needed. Hard work and fiscal discipline is the only way out
of this crisis. It won't happen overnight.
One solution for the federal and state debt crisis
in the United States is to eliminate all tax deductions and all tax loopholes.
No or at least less tax exceptions would increase both fiscal revenues and
The United States is not alone with its problems. Both Euroland and Japan
have been living in a fiscal fantasy world too. It is time to change now,
not only our public and private spending habits, but also our banking
The financial system as a whole (including the derivatives casino) is out of
control. The mortgage market has not stabilized. The financial crisis has
increased power in the hands of even fewer banks. Instead of splitting up
banks and limiting their interconnection, bankers and politicians have made
the situation worse. The problems of too-big-to-fail and of a blatant lack
of accountability remain on the table. There will surely be another banking
crisis in the future. If we do not enforce the personal liability of banks
and bankers and if we do not create smaller and less inter-connected banks,
the next banking crisis may well bring the world's financial system down.
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