27th September 2012 by The Harried House Hunter
In recent years America’s national debt has increased significantly due to the impact the global financial crisis has had on the economy, forcing government expenditure to increase. According to the Center on Budget and Policy Priorities the total national public sector debt surpassed $10 trillion in 2011 and it is expected to increase further in coming years. The cost of the deficit is compounded with interest payments, which have to be made each year.
Currently 6 percent of the annual federal budget of $3.6 trillion is spent on interest payments towards the deficit, which is a sum of $230 billion. However what is more concerning is that $1.3 trillion of the annual federal budget is paid for with debt, meaning the deficit will increase by a further $1.3 trillion every year unless spending is cut by over a third. So not only is the current deficit enormous, but it is growing each year by around ten percent.
Suggestions have been made about how to deal with the excessive level of debt. The Obama administration has blamed the weak economic conditions for the high deficit and claims America can grow its way out of the recession. The Republicans have put forward austerity plans to cut the national debt in tandem with an expectation that cuts in the public sector will lead to growth in the private sector.
Concerns have been raised about the viability of both of these policies due to the current economic conditions and the volume of the outstanding debt. As this is a matter of debt management, perhaps it is time to question whether the best policy would be to attempt to manage the debt more effectively to alleviate the pressure it puts on the economy. A mechanism to restructure sovereign debt could be one alternative suggestion to change the position of the American economy.
If the interest payments could be rearranged to stop the debt compounding further this would give the federal government $230 billion to use more appropriately elsewhere. However the existing deficit would be the area where most could be achieved, if some kind of reduction agreement could be made with the creditors. This could provide an alternative avenue to enable economic recovery instead of growth, which seems unlikely, or austerity, which would be unpopular.
A national creditor’s agreement, which would be a debt settlement contract where the debtor nation pays a lower amount of debt than originally agreed, would reduce deficit and interest payments. It might be in the best interest of the creditors to receive less than they expected in repayments, as it would protect the majority of the principal investment they made, if it prevents complete default. In short cutting their losses earlier might provide security on a larger scale than holding on to an unrealistic expected repayment.
It is likely that this action could impair the credit rating of America. However a restructuring of debt would make the long-term economy more viable and recovery easier, so any new debt taken on would be more likely to be paid back. Also the recent credit downgrade of the U.S. had little, if any, impact on the ability to sell U.S. treasuries on the financial markets. This suggests the global economy is so dependent on America that it is supported by other countries to maintain their own prosperity.
China for example receives a large percentage of its demand from America, making the two economies intertwined. If America’s economy declines the Chinese economy will also decline. China will likely continue to buy American debt to sustain its own economic output. So it is possible that the market for American debt is inexhaustible regardless of how unlikely it is to be paid back.
This makes the idea of a national creditor’s agreement fairly realistic and could provide an alternative way of dealing with the economic woes that have afflicted America in the last few years. It might be time to consider such an action as an alternative to the existing growth and austerity plans that are currently dominating economic debate.
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