US is Plunging Deep Down Into Debts

Nobody seems to know how much debt can the US afford but lately it has been taking a lot of debts, at least in quite noticeable amounts since the World War II. The International Monetary Fund releases its Global Fiscal Monitor Report that aims to capture the debt figures for most of the developed economies, and it helps in paying back most of the debts, but the US is an exception as it is not able to pay back much. In fact, the US government debt is supposed to touch 96.2% of its GDP by 2028. The figures are as high as that in 1946 when it has borrowed heavily for its industrial revolution. However, the debt continues to rise, and there are certain factors that will weigh in heavily.

  • The interest rate is one of the important factors – For as long as its interest rate stays lower, the debt burden of the US can be taken with relative ease. There is simple mathematics to it – the ratio of debt to the GDP will stay the same as long as the debt increases at the same rate as the economy. The economy of the country is estimated to grow at a rate of 4%, and therefore the debt should also grow at a rate of about 4%. Therefore, the primary budget of the government should stay near to 4% so that everything can be properly stabilized. In fact, as early as 2007, this scenario was met by the government and hence, this can easily be done.
  • The government confidence needs to be there in investors – Government confidence is a factor that can weigh in heavily for as long as investors believe in the government’s ability, managing debt is not at all a problem. This has also been demonstrated in 2008 when the government stepped in to calm down market sentiments. However, to be on the safer side, the European Union asks its member states to keep maximum government debt at 60% of their respective GDPs to be on the safer side.

Considering all the facts mentioned above, the US would need a substantial primary budget surplus to keep the debt in check. Only time will be able to tell whether this debt has helped or ruined the economy of US.

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