The United States is by far the world's largest economy, a country that dominates the global monetary system. Stock exchanges, private investors, speculators and different funds worldwide all look up to Wall Street, the most liquid centre of global finance.
There is also the matter of the United States currency which holds the first place as the world reserve currency and the one mostly used in foreign exchange transactions and international trade. It is of course, the dollar. Recently, President Obama had a small crisis regarding the growing national debt between the two main parties. Although the problem was resolved, most economists view it as only temporary solution.
Standard and Poor's reacted to these issues over three weeks ago by downgrading the United States credit rating from AAA to AA+ on August 5, 2011. It was first time ever that the perfect rating came into question, more concerning being the negative long-term outlook and the prospect of lowering the rating further within the next 2 years. One must state that the United States still has AAA rating from other ratings agencies.
National debt increased dramatically over time
So why is the national debt size a problem? To understand this we need to look at the basic principles of macroeconomics. The United States public debt is the money borrowed by the federal government through the issue of securities by the Treasury and other federal government agencies. The national debt consists of two main components, first being debt held by the public, the Federal Reserve System and foreign, state and local governments and second called intragovernment debt.
The United States has had a public debt since its founding in 1791. The budget is balanced, but the amount of money in the system changes with the circumstances. Usually increased debt occurs during the times of war such as American Revolutionary War, the War of 1812, World War II or more recent examples such as Iraq or Afghanistan. The length of recent conflicts burdens the budget greatly. History also shows spikes in debt numbers during the crises, because of the social programs aimed to relief difficulties at hand.
The national debt structure
The United States debt is currently over $14.5 trillion dollars and is equivalent sum of all outstanding debt owed by the Federal Government. Approximately two-thirds are the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds. For foreign investors like China and Japan, the United States is such a large customer that it's only logical to invest in, hence financing their own exports. But the problem is size, since the national debt is also the largest in the world. The current debt is nearly 100% of GDP, which was $14.7 trillion in 2010. A trillion sounds really big.
I mean usually people consider a million or a billion big numbers, but just how much zeros is there in a trillion? The correct answer is twelve. Therefore a trillion would be a thousand billions or a million millions. To put it in numbers a trillion equals 1,000,000,000,000. The estimated United States population is 311,210,107 so each citizen's share of this debt is $47,124.53.
It could represent a potential for future crisis if not addressed in time. The national economy is still little above recession levels, growth prospects seem dubious and the unemployment frightening. More than 14 million Americans are without jobs. All of a sudden, a trillion is the standard unit of choice when talking economic problems and the possible answers. The best cure to United States deficit problems is a strengthening economy with more jobs, more consumption of goods and services, thus adding more tax revenue for the United States Treasury. It doesn't mean the country in on the verge of a major debt crisis. It means that the time for better control of fiscal policy has come and the world is reaching a point at which this issue can't be ignored. No doubt, interesting times will follow.
Bojan Baretic, MA in Economics