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, which could “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 assets.

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 dollar-denominated assets.



 Today's deals at Amazon.com - Special offers on new releases from Amazon.co.uk.

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 fiscal fairness.

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 system.

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.

 Sheet Music Plus for the World's largest selection of sheet music, songbooks and guitar tabs.