Debt Crisis Casts Shadow Across National Economic Recovery

While the media is full of reports heralding the early signs of national economic recovery, there are many economic experts and business leaders that believe we are in the grip of a debt crisis, one that is sure to cast a shadow over a fledgling US recovery. American debt is monumental and record-breaking, as are the associated loan servicing costs, both in terms of public and private debt, such as the national debt created by the government and the debts of businesses and the average citizen. Many fear that the near universal crisis of debt that the United States is experiencing may do far worse than slow recovery, seeing the potential for such economic disasters as rapidly increasing inflation and full-blown economic depression.

Expanding Government Debt, Increasing Economic Instability

Drowning in debt and deficits, the government is in big-time financial trouble. Already burdened by the expenses of war, the financial condition of the government has been devastated by the worst financial downturn since the Great Depression. According to an article published by the Wall Street Journal on August 26, 2009, "The Office of Management and Budget revised its May deficit projections to forecast a record, $1.58 trillion deficit for the fiscal year that ends Sept. 30. Spending, much aimed at stabilizing the financial sector and boosting the economy, will rise by 24% this year, the largest increase since 1952 and the height of the Korean War, according to the CBO. Tax revenues will fall 17% from last year's levels, the largest drop since 1932."

Furthermore, as stated in the article, the federal government has had to increase the projected 10-year budget deficit by a staggering amount of $2 trillion dollars. The government's ability to spend more than it has relies heavily on other nations being willing to loan the United States money, such as via the purchase of US government bonds. One of the largest buyers of US government debt is China. According to an August 19, 2009, Reuters report, "the country owns an estimated $1.6 trillion of U.S. securities." However, as written by David S. Markun in the Shanghai Daily on August 20, 2009, "recently there has been much discussion about the dilemma the Chinese government faces stemming from its large holdings and continued purchases of United States government debt."

That is because with the financial crisis the United States is experiencing, the value of the dollar could take a serious hit, resulting in significant, perhaps even massive, losses for China and everyone else dealing in American dollars. On August 18, 2009, the BBC reported that "China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury." One of the primary fears is inflation, which is a very real possibility, given current conditions and the potentials for the need to increase the money supply with the printing presses, once loans and promises are no longer enough to fuel government spending. Argentina-style hyper-inflation is a worst-case scenario that some economists fear, as the gap between what the government has and what it spends widens to astronomical, record-setting degrees.

Business And Personal Finances Affect Government Debt

Tax collection is the foundation of government spending. As the conditions of the economy deteriorate, the amount of taxes taken in falls, as taxpayers reduce spending. Unemployment is reaching heights that haven't been seen since the last economic depression the nation experienced, with a current rate - when measurement methods similar to those in use during the Great Depression are utilized - of about 16 percent, according to Federal Reserve official Dennis Lockhart, quoted in an August 27, 2009, MoneyNews.com article.

Naturally, the massive job losses have contributed to the dramatic reduction in consumer spending, which has, in turn, contributed to further lay-offs, as businesses see sales and profits fall. Increased unemployment has become a driving force behind the continued wave of foreclosures moving throughout the nation. Credit card companies are seeing delinquent payments and total defaults spiraling higher, as borrowers simply do not have the money to pay them. Local, state, and federal governments all are losing income as sales taxes, property taxes, and other forms of taxation see significant drops in revenues collected and struggle to find ways to finance their operations, taking on still more debt, much of which will be shifted to the taxpayers that are still able to pay. It is an ugly cycle and makes recovery a very difficult process.

The United States, both citizens and government, face a debt crisis that will become increasingly more debilitating if it is not dealt with in a productive manner, one that actually deals with the debt, rather than just shifting it around while continuing to increase it. As consumer stats and falling tax revenues indicate, the average citizen gets it. It is time to reduce spending, decrease debt, and increase savings. However, until the government comes to this understanding, true financial recovery in this nation may very well be a long time in coming, since government spending always translates to public debt borne by taxpayers.