Fiscal Doomsday: It could happen here
Published: Wednesday, October 16, 2013
Updated: Wednesday, October 16, 2013 22:10
The United States government is currently scheduled to reach the debt ceiling today, at which point it will no longer have authorization to borrow money unless Congress acts. At the time of writing, a resolution to raise the debt ceiling seems almost certain to pass both houses of Congress and be signed by the President. If a resolution had not passed, the government would have defaulted on its debt and there would have been catastrophic economic effects. However, the practice of accumulating more and more debt is unsustainable and will eventually lead to economic collapse on its own. While it would be catastrophic not to raise the debt ceiling this time around, the federal government must stop accumulating debt after this.
The federal government typically pays off old debt by selling new debt. While this alone does not increase the amount of the debt, excessive government spending does cause higher debt levels. The government then will eventually sell new debt to pay off that debt, plus create even more new debt by spending more down the road. This strategy cannot work forever. There is a reason you cannot pay your credit card bill with another credit card. If people were allowed to do this, they could run up increasing debt indefinitely until all their credit card companies blocked their line of credit. At this point, they would have little to no resources to pay off all that debt because they never had the money to begin with – it was all borrowed.
If the federal debt were being accumulated by any private citizen in the same way as the government, they would have long ago lost all lines of credit and possibly been arrested for fraud. However, the government has gotten away with it so far. According to US Treasury figures, about $5.5 billion of the almost $17 billion in debt is owned by foreign countries. Sooner or later, these countries are going to realize that at some point, the United States will be unable to pay back their debt. Although we may avoid a default this time around, it will certainly worry other countries. If America continues this financial strategy, it will eventually become such a large credit risk that other countries will either charge us higher interest rates or refuse to lend to us at all.
The former scenario is slightly better, but would prevent the government from borrowing as much money, which would force significant and immediate spending cuts as well as make it harder to pay off what debt we have already accumulated. This will result in interest rates increasing again, and eventually it will come down to the second choice and countries will not lend us any more money. It is hard to say whether that will come soon, or whether they will raise interest rates first, but if we continue on this downward spiral, eventually countries will refuse to lend us any more money.
At that point, the American government would struggle to pay off what debt it already owes, which would significantly impact the economy. Greece accumulated so much debt it was unable to pay it back, and their economy has now tanked. This scenario would be far worse, since we have a far bigger economy than Greece ever had.
Once the debt becomes overdue, some countries will demand America pay it back immediately. Unfortunately, without being able to borrow more money to pay it back, the United States government will struggle to find other ways to get it. The small nation of Cyprus faced a similar predicament earlier this year, when they were on the verge of bankruptcy due to accumulated debt. In an attempt to resolve the crisis, the Cypriot government seized 37.5 percent of the money in all private bank accounts worth over 100,000 Euros (roughly $128,000.) This led to a run on the banks and devastated the economy even more. In an Associated Press article, University of Cyprus political scientist Antonis Ellinas predicted unemployment would “go through the roof” for several years.
Due to the fact that there are far more assets held in American bank accounts than Cypriot ones, the effects would again be much larger here. If it comes to that point, the American economy would be ruined for decades to come, perhaps longer.
If Congress starts cutting spending significantly and balancing the federal budget to avoid creating new debt, none of these potential doomsday scenarios will ever happen. However, if the government keeps accumulating more debt at faster rates than ever, it will eventually lead to the downfall of the American economy.