Impact of Debt on United States Economy

Introduction

The United States debt refers to money borrowed by the federal government to finance its local and international operations. This is in the form of securities issued by the treasury and other government agencies (Jeffrey 54). The United States debt consists of two components. The first component is public debt that involves securities held outside the federal government by investors, foreign states and governments and the Federal Reserve System. The second component involves securities held by different government agencies such as the Social Security Trust Fund (Jeffrey 55). The amount of the annual budget deficit or surplus determines whether the public debt increases or decreases.

This budget deficit refers to the financial difference between the federal governments earnings and spending, ignoring transfers that occur between the different branches of the government. However, some spending that contributes to the debt is not included in the deficit report. Though the presentation of the deficit on accruals basis may help expound on the long-term implications of the governments operations, the deficit report presentation is on a cash basis (Jeffrey 57). Since the year 2003, the United States federal government has seen its debt increase by approximately $500 billion. This further increased by $1 trillion in the year 2008, by $1.9 trillion in the year 2009 and $1.7 trillion in the year2009. The total accrued debt was $10.597 trillion by February 2012 (Gwartney, et al 44). This debt has several impacts on the economy. It has a negative effect on the gross domestic product, puts the United States in danger of a possible financial default and strains financial operations with other states on the global arena.

Discussion

This high debt affects inflation, interest rates and the countrys economic growth. Many factors are affecting the value of the U.S dollar and therefore putting it at risk of decreased value or possible inflation. This is challenging the role that the dollar plays as the reserve currency of the world (Gwartney, et al 47). The government accountability office together with the government auditors claim that the current financial path the government is taking is very risky as it may lead to an unsustainable financial situation. The contributing factors include the current mortgage crisis and trade deficits. This means that the imports have exceeded the exports and therefore spending power is higher than the earning power (Jeffrey 77).

These high debt levels pose a direct effect on the rate of economic growth. The CBO has cited several possible risks that are associated with the rising debt that may affect the economy in a great way. The government will spend a large amount of savings in purchasing debt instead of investing in income generating ventures. This will result in low output and low income (Gwartney, et al 81). The rising interest on the debt may necessitate a tax raise that may discourage people from working because of high taxes. These costs may also result in a decrease in the funding given to certain government agencies and programs. This has a direct negative impact on the economy in that it may slow the growth rate. There is also a risk of a fiscal crisis that may certainly move investors to demand for higher interest rates to cover the risks inherent to their investments. This will be in an effort to prevent any possible losses (Gwartney, et al 123). The high debt is more likely to affect the health care sector too. Some economists have claimed that a reduction in the entitlement and health benefits of retired citizens and a reduction in health care funding may help lower the debt. This will pose a significant risk to the national economy. This is because health care and savings play an important role in the growth of the economy.