The Congressional Budget Office predicts the federal deficit will reach $1.2 trillion in 2009. In 2008, the federal debt reached a record $10 trillion, from just $6 trillion eight years ago. Furthermore, the Federal Reserve’s balance sheet has expanded from less than $900 billion in September 2008 to more than $2.26 trillion as of Dec. 12, 2008.
These financial figures are so troubling that their significance is worth further discussion, because how the government conducts fiscal and monetary policy today will greatly impact our standard of living in the future.
Let’s begin by discussing the federal debt versus the federal deficit. Often, people use these words interchangeably, but their meanings are different. A federal deficit — or surplus — is the difference between incoming revenues from taxes, land sales or fines and outgoing expenditures for a given year. For example, if the federal government collected $3 trillion in taxes, fees and other revenues this year but spent a total of $3.3 trillion on building roads, paying employees and buying souring loans from banks, it would report a budget deficit of $300 billion.
To pay the deficit amount, the government must borrow money. Every year, the current deficit is added to the overall federal debt. The federal debt is equal to the accumulation of yearly federal deficits.
Evaluating current federal budget figures leads to some startling conclusions. Most worrisome, our government continues to spend beyond its means while letting the country’s outstanding debt grow exponentially. While the federal budget deficit for 2008 reached a record of $455 billion, next year’s projected deficit will be even larger, $1.2 trillion.
To finance the yearly deficit and record debt, the U.S. Federal Reserve — the country’s central bank — has been selling Treasury bills and bonds. This year, it has been selling an unusually large number of government debt notes to finance the bailout of the country’s major banks. The printing of additional cash and selling of Treasury bonds account for the huge expansion of the Federal Reserve’s balance sheet, from less than $900 billion in September to $2.26 trillion in January. These actions are akin to running up a huge monthly credit card bill and simply printing money to pay the interest.
Indeed, during President Bush’s administration, the federal debt doubled from about $5.5 trillion to nearly $11 trillion. With a yearly gross domestic product — the broadest measure of U.S. economic output — of $13 trillion, the federal debt now accounts for about 84.62 percent of yearly economic output. If the federal government wanted to pay off this debt in a year, it would need to tax salaries and business revenues at an 85-percent rate.
To combat the current crisis, the government is putting itself into debt more quickly than at any time in the country’s history. What does this mean for our generation?
First, we should expect to pay much higher taxes in the future. The government will need to generate more revenue to pay off its debt. Indeed, the tax rates of the last 25 years are very low compared to other periods in U.S. history , so we should certainly expect an increase during the next several decades.
Second, many economists write of a “doomsday” scenario in which countries buying treasury bills and bonds — U.S. debt — simply stop investing in them. In this scenario, the U.S. would be unable to finance further expenditures and would most likely default on outstanding debt obligations.
Because of the interconnectedness of the world economy, however, a U.S. default would be disastrous for many other countries as well. For example, China holds $1 trillion dollars worth of U.S. treasury notes. If the government was to default on its debt, China’s holdings would suddenly become worthless. Thus, investors in U.S. government debt likely would never let a default occur.
A more likely scenario is that U.S. debt could suffer a ratings downgrade. Federal debt is currently considered the safest investment in the world. If such a downgrade occurred, the American economy would suffer greatly, as borrowing costs for all types of assets would sharply increase. In short, any sort of default or downgrade involving U.S. debt would result in an economic recession and a severe reduction in U.S. living standards. While such a downgrade is not imminent, reckless spending by our government will certainly make such a downgrade more plausible.
Finally, the most immediate consequence of the growth of America’s federal debt is already taking place: a slow devaluation of the dollar. Both the Japanese yen and European euro are trading at historic highs against the dollar. Such currency swings make the dollar less attractive as a global currency. In the long term, a weak dollar will hurt Americans’ standard of living as foreign goods become more expensive and it could undermine America’s standing as an economic superpower.
Clearly, the growth in the federal debt portends many negative economic consequences to come. As Americans, we have a responsibility to elect officials who will have the political courage to pay down the government’s giant liabilities and to hold them accountable. It is a domestic, economic and national security matter of the highest importance.
Andrew’s column runs biweekly Thursdays. He can be reached at a.golden@cavalierdaily.com.
Read More
It’s okay not to be okay
By Mai Hukuoka | 6 days agoWhether talking to a friend, a loved one or a professional, it is so necessary, and human, to need more than you can provide for yourself.
Taking a break at Tangerines Kitchen
By Charley Thomas | January 6, 2025What the restaurant somewhat lacks in ambiance, it compensates for in tasty dishes and prompt service.
Virginia Policy Lab — a hub for student-led policy action
By Katherine Haden | December 9, 2024Students propose their own projects and collaborate with other members to research their issues of interest, brainstorm solutions and write policy proposals.
