The Fallacy That is the Debt Crisis: A Basic Introduction

For years American politics have been plagued with conservative “deficit hawks.” Arguably the most harmful philosophy to our nation’s prosperity, deficit hawks have held back the full potential of the United States through the boogeyman that is debt; both foreign and domestic. This toxic ideology has been the grounds for opposition to infrastructure improvements, universal healthcare, welfare reforms, and most recently, the infamous Green New Deal. Lesser educated and profit incentivized businessmen have lied to the people for years, while the theories of economics PhDs have been neglected.

What is Debt?

Although it sounds like a silly question, many people seem to have a feeble understanding of just exactly what debt is. According to Merriam-Webster, debt is simply “a state of being under obligation to pay or repay someone or something in return for something received.” Most people seem to understand that definition, but once the debt goes national, it does over their heads. Debt is simply an alternative way for the United States government to finance its programs. The United States Department of Treasury issues bonds at a fixed interest rate. This simply means that someone or something gives money to the United States Treasury Department with the promise it will pay the lender back and more in the future.

Why the Debt Does Not Matter

The United States is a safety dream. Because of the economic strength that the United States has, individuals and central banks feel comfortable lending money to the Treasury. The security allows for the United States to pay extremely low interest rates on the bonds. Why this matters is that because the rates are low, it is almost always worth it for the United States to take borrow credit. The key is to use the money for programs that are worth it. For example, using debt to pay back existing debt would not be a good idea. However, programs such as free college would be worth going in debt for. According to the Center for American Progress, it is estimated that by the year 2020, 65% of jobs will require at minimum a bachelor’s or associate’s degree. Is it not common sense that taking out a loan at a scandalously low rate to modernize your economy is a good idea?

Another common talking point for deficit hawks is the debt to GDP ratio of ~106%. There are three simple ways of countering that scare tactic. The first is that many other strong, successful economies have debt to GDP ratios significantly higher than that of the United States. France, Japan, and Ireland each have debt to GDP ratios of 116.1%, 232.5%, and 132%, respectively. Not only that, but when the United States was in one of its greatest growth periods, after the Second World War, its debt to GDP ratio was 121.7%! Thirdly, there is a simple way to understand why it is okay to have a high debt to GDP ratio. Imagine a man making $950,000 a year. The man finds a banks willing to allow him to borrow 6.8 million dollars at an extremely low rate of 1%. Although his debt to earnings ratio would be very high, no reasonable person would argue that it would be unwise to take out the loan.

To the point of the fear mongering over foreign debt: if anything, Americans should feel lucky that foreigners are so willing to purchase United States debt bonds. No legitimate investor would ever recommend purchasing bonds that pay so low interest, unless was close to retirement. To emphasise said point, US Treasury bonds are essentially 30 year certificates of deposit at 3%. The interest rate is just under the rate of interest for Treasury bonds!


“…This is not something that’s going to grow your buying power or your wealth in any meaningful way. And you’ve got tremendous interest-rate risk if, for some reason, you need to sell prior to maturity.”

Greg McBride: CFA, Senior Vice President, and Chief Financial Analyst for Bankrate

Meaning, if you invested $1000 in 1989, that investment would be worth around $2400 today. (That barely even makes up for inflation!). Compare that to if you had invested $1000 into the S&P 500 30 years ago… your investment would be worth around $10000! Okay, so why don’t these foreign investors just invest in the stock market? One answer is security, but the other is power, or at least perceived power. Despite was deficit hawks tell you, just because China owns a lot of U.S. debt, doesn’t mean that they control our country. In fact, people freaking out over foreign debt holders is exactly what countries like China want. They want Americans to think that they hold all of the power by owning a somewhat significant portion of United States Treasury bonds. Editors at the website ChinaPower, an organization that tries to explain China’s global power, point out that “China’s stake in America’s debt has more of a binding than dividing effect on bilateral relations between the two countries.” And in August of 2015 when China diminished their amount of U.S. Treasury bonds by $180B, the United States economy was largely unaffected.

Works Cited

Bergeron, David A., and Carmel Martin. “Strengthening Our Economy through
     College for All.” Center for American Progress, 19 Feb. 2015,
     www.americanprogress.org/issues/education-postsecondary/reports/2015/02/19/
     105522/strengthening-our-economy-through-college-for-all/.

Johnson, Paul M. “National Debt.” Auburn University, 2005, http://www.auburn.edu/
     ~johnspm/gloss/national_debt.

Kenton, Will. “Debt to GDP Ratio.” Investopedia, 9 Mar. 2019,
     www.investopedia.com/terms/d/debtgdpratio.asp.

Mbaye, Samba, et al. “Global Debt Database: Methodology and Sources.”
International Monetary Fund.

Goldberg, Matthew. “How Often Do Treasury Bonds Pay Interest.” Bankrate, 14
     Sept. 2018, http://www.bankrate.com/investing/
     how-often-do-treasury-bonds-pay-interest/.

China Power Team. “Is it a risk for America that China holds over $1 trillion in U.S. debt?” China Power. February 2, 2016. Updated February 6, 2019. Accessed March 28, 2019. https://chinapower.csis.org/us-debt/

One thought on “The Fallacy That is the Debt Crisis: A Basic Introduction

  1. This short piece does not adequately address deficit hawk arguments whatsoever. Yes France and Japan have greater debts–and dramatic social problems (the latter lost an entire generation of wealth and reproduction in the 90s; the former is currently on fire). And the idea that serious debt critics dont understand debt is a strawman.

    Like

Leave a Reply to Kermit Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s