America’s debt
However, with the rise in power of other countries such as China, it is more important than ever that America keeps its debts under control. With China becoming much more powerful and wealthy, its currency could become the world’s reserve currency in the near future, which would greatly affect America and the bond market. If America continues to borrow at increasing amounts and inflation is constantly higher than the past few decades of low inflation, then they may start struggling to afford the interest payments. The bigger problem may start when people begin to realize this. First the credit ratings for American bonds may be downgraded, then people and institutions would want a higher interest rate (coupon) to offset the increased risk of default. With higher interest rates, the repayments will be even more expensive for the government and may make the bonds riskier, causing the interest rates to increase further to compensate for more risk. As the bonds get riskier, more people will stop buying the bonds, meaning that America wouldn’t be able to borrow as much and would have to increase taxes and reduce its government spending. To overcome this they could print more money (quantitative easing) which would allow them to pay off the debt at the expense of ruining the currency and increasing inflation. If America did default then the world economy would be in turmoil for decades and the effects would be many times worse than the Great Financial Crash of 2007-8. This is because of the trillions of dollars that would be wiped from existence, due to the devaluation of the bond markets. Defaulting would destroy the reputation of the US, make it much harder or expensive to make trade deals and borrow money in the future as countries may not trust America anymore to pay back its future debts To conclude, America, if it isn’t reckless with its spending and doesn ’t run too large of a deficit, never actually has to fully pay back its debt. If it keeps increasing its total debt at the current rate and does n’t increase its economy’s growth faster than the debt then it soon won’t be able to afford to service the debt and will run into very large problems, like having to greatly cut expenditure, increase taxes or to quantitative ease. As the example of the UK shows, it is perfectly possible to roll on its debt for hundreds of years without consequence. All America needs, is to have a low inflation rate, as this should keep the interest rates lower and therefore make it cheaper to service the debt. But also a high and sustainable growth, whether that be from improving industry and technology or a growing population, as this would increase tax revenue and reduce the budget deficit.
Bibliography
Amadeo, K. ‘ Who Owns the US National Debt ?’. The balance. Date consulted 29 July 2023 . https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124 Budget Committee. ‘ The Past is Prologue: Biden’s Deficit Spending Record ’. Date consulted 29 July 2023 . https://budget.house.gov/press-release/the-past-is-prologue-bidens-deficit- spending- record/#:~:text=Record%2DBreaking%20Debt&text=Under%20CBO's%20current% 20projections%2C%20the,to%20%24154%20trillion%20by%202053 . Castle, S. ‘ That Debt From 1720? Britain’s Payment Is Coming’ . The New York Times. Date consulted 28 July 2023 . https://www.nytimes.com/2014/12/28/world/that-debt-from-1720- britains-payment-is-coming.html
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