The Debt Debate-with Basic Economics

Clint Kennedy

BasicEconomicsToday.com

What is a basic explanation of the current debt crisis?  Expenses in excess of income have now reached a new level for the government, i.e. the deficit is huge.  The total debt the US government owes is $14.3 trillion (Treasury Direct, 2011).  It has reached the limit set by Congress. 

                The Federal government now has three options.  It can reduce its spending and cut programs.  It can raise the debt limit and issue more treasury bonds.  Or it can default on payments.  These default payments could be for current expenses, such as the next issue of social security checks, or for Treasury bonds that have been become due.  Defaulting on Treasury bonds would be devastating to the US financial sector.  The US economy requires a reliable payment system between its government and its investors.  Defaulting on payments to current expenses wouldn’t make sense either.  Transfer payments must be paid to citizens so they can maintain minimal living conditions.  Other delayed payments would accrue at a higher interest rate than a new bond issue, which would be at approximately 4.38 percent (Treasury Direct, 2011).  It also appears unlikely that the government can reduce program costs enough to eliminate the deficit problem by August 2nd.  That leaves one option left.  The debt ceiling must be raised and new Treasury Bonds must be issued.  This is now a given.  The current political debate is really just an expensive show for the American public.  It’s also an attempt to get votes by the political parties.  This is unfortunately a failure in the political system. 

Issuing new Treasury bonds sounds easy, but who is going to buy these bonds when everyone knows the US government is near crisis?  Tax collections have been weak because consumers and companies have not been generating enough income.  If necessary, the government can buy its own debt.  Intragovernmental holdings are $4.59 trillion (Treasury Direct, 2011).  That’s about one third of the total debt.  The government already owns a large portion of the debt.

Our political representatives in Congress should be discussing, “how can we help companies to grow in a manner that enables hiring to take place?”

TreasuryDirect (2011). The Debt to the Penny and Who Holds It. Retrieved July 14, 2011 
         from http://treasurydirect.gov/NP/BPDLogin?application=np

Copyright © July 2011