Most Americans know that the United States government has financial problems, but few are aware as to just how dire these problems are, or how the government got itself into such a financial mess. Although the financial crisis now facing the U.S. government has been more than two decades in the making, only since the economic collapse of 2008, has there been much media coverage of the long-term, reckless deficit spending and the skyrocketing national debt, that have brought our country to the brink of national bankruptcy.
In 1981, the national debt reached the $1 trillion mark for the first time in history. This one trillion dollars of national debt represented the cumulative deficit spending of all the presidents from George Washington through Jimmy Carter, and much of it was the result of the heavy spending on World War II. A debt of one trillion dollars, accumulated during a 200-year period, was no big deal. Back in the 1970s, I regularly told students in my college economics classes that the national debt was not a major problem for the United States, and it was not at that time. Most of the debt was owed to American citizens so, whenever interest payments were made, the money flowed right back into the American economy.
I could not have imagined, at the time, that government leaders were about to launch our nation on a financial suicide mission that would inflict enormous injury upon the nation and the American people. But that is exactly what happened. The national debt that had taken 200 years to reach the first $1 trillion, doubled to $2 trillion in just five years, and quadrupled to $4 trillion in twelve years. Today, the national debt is above $12 trillion and growing so rapidly that we will add a lot more to the debt in just one year than we did during the first 200 years of our history. It is true that, if we adjust for inflation, the growth in the debt is somewhat smaller, but it is still astronomical.
As the national debt soared, we soon reached a point where the amount of money that Americans were willing to invest in United States Treasury Bonds was not nearly enough to satisfy the government’s out-of-control appetite for borrowed funds, so we began borrowing massive amounts of money from foreign nations. As of March 2009, approximately 28 percent of the total debt, and nearly 45 percent of the publicly held debt, was owed to foreign investors. Our biggest foreign creditor is China, to whom the American government owes approximately $1 trillion. Even worse, the United States government is counting on China to lend us a lot more money to help us get out of the financial pinch we have gotten ourselves into. One of the first nations visited by Secretary of State, Hillary Clinton, was China, and her primary mission was to reassure the Chinese government about United States finances and to encourage China to keep the money coming. Japan is America’s second largest foreign creditor. In addition, since the government borrows money by offering United States Treasuries at auction in the open market, we owe at least some debt to many other foreign countries, including Russia, The United Kingdom, Brazil, Germany, Switzerland, Mexico, India, Norway, and France.
The total interest cost on the national debt for 2008 was $451 billion. At least $125 billion of that was paid to foreign investors, and thus flowed out of the American economy. Imagine how much that $451 billion could have bought in the form of education, health care, road construction, or even tax relief. Interest rates are very low today, by historical standards, but they will not always be low. When interest rates rise, the interest cost on the same amount of debt will be higher. If current interest rates were to double, over a period of time, the $451 billion interest cost would double to $902 billion. The United States government has dug itself into a very deep hole over the past 28 years. We are in so deep that we can barely see the dim light at the top of the hole. Unfortunately, instead of filling the hole in, our government is digging it deeper and deeper!