The Financial Status of the United States Government

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!

Dr. Allen W. Smith is a Professor of Economics, Emeritus, at Eastern Illinois University. He is the author of seven books and has been researching and writing about Social Security financing for the past ten years. His latest book is The Impending Social Security Crisis: The Government’s Big Dirty Secret. Read other articles by Allen, or visit Allen's website.

6 comments on this article so far ...

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  1. Don Hawkins said on December 19th, 2009 at 10:01am #

    Academic professor a new way of thinking is needed and needed soon.

  2. bozh said on December 19th, 2009 at 11:32am #

    A question for the professor Smith? Is a hobo’s and a house person’s debt equal to that of a pol, editor, ceo?
    Another question wld be, Are US gov’ts responsible for such debts or is it largel or solely US governance responnsible for money owed.

    After all, everything that functions in US: its judiciary, cia, fbi, army, media, education function under one constitution and one and the only governance of which a gov’t is a mere branch and not the bole? tnx

  3. Charlie said on December 20th, 2009 at 3:25am #

    America has become (or will soon become) a feudal state unlike any other since the Middle Ages. The lower economic classes and most of the so-called middle classes have become serfs. They are slaves to debt-fueled consumerism. Like their government, they pay with borrowed money to acquire junk and then delay the inevitable day of reckoning by borrowing more–hence our trade deficits, for example. Unlike the conditions in earlier feudal states, however, the American serfs have deliberately chosen to be in bondage to the lords through willful ignorance of economic realities and a childish, selfish demand to play but not pay.

    Americans want this status quo to continue. They support America’s vast and staggeringly expensive imperial ventures, particularly the military police states and quisling governments we place around the globe, but those same Americans adamantly, loudly, and sanctimoniously demand that they be presented with no bill for services rendered in the name of empire.

    The average American demands that the government spend more and tax less. In the most dire circumstances, such as those we currently face, Americans and their politicians will rush to cut social services while at the same time expanding military expenditures by greater amounts.

    In contrast, I whole-heartedly support a war tax. Americans, if they are to survive economically, must begin to understand the true costs of maintaining the shell of empire built on an economic corpse. Our nation has no money for sorely needed infrastructure projects, no money for health care, no money for educating our children, no money for vital social programs; but we do seem to have a bottomless pit of borrowed money for wars of occupation. Such unsustainable economies, rooted in serfdom and structured on the ignorance of voters, will destroy us.

    I am tempted to say that Americans have the government and the economy they richly and thoroughly deserve. But the economic punishment for America’s profligate ways is going to be visited on those who deserve it least. If we do not change soon, our empire will end badly.

  4. Nick said on December 21st, 2009 at 1:01pm #

    The american wars have been fought to sustain capitalism. The countries that cooperate with american wars want to sustqain this bloody system. Wars are bubbles, as everything else in this stupid system…

  5. bozh said on December 21st, 2009 at 2:10pm #

    Waging a war of aggression is the most serious business. In war time, most people fall in line. They are more frightened to talk when war is on than when war is not the mode.
    So the purpose of waging wars is also to tighten the grip on power and control of the people and not only to steal land and thus obtain resources more cheaply than the warlords wld have in peace time.

    In addition, it seems to me, that most americans think that a war is waged by a prez. And no prez can be wrong no matter what he may do. This is also a constitutional demand or even command.
    Furthermore, the ruling class admonishes the people not to change the horses in midstream and to rally around the prez.

    In short, as far as the americans [who matter] goes, all US wars are defensive.
    All future wars [at least 40 more] will all be defensive wars; again, according to people that matter.
    And of course in wars also.
    That’s why each of the 170 + US wars, invasions, incursions, raids not one had been wrong morally or legally.
    Eat ur hearts out! No one can best an apsolutely best rule ever! It is fullproof!tnx

  6. Mulga Mumblebrain said on December 23rd, 2009 at 9:53am #

    This state of affairs is truly wonderful. Once the US Moloch is bankrupt, once civil strife breaks out as the villeins attempt to liberate themselves from the feudal bondage of the Goldman Sachs barons, then the US Empire of Global Terror will begin to crumble. Across the world US aggression and violence will ebb, the archipelago of hundreds of bases will begin to close, the preposterous Status of Forces Agreements that grant the Yankee overlords extra-territorial rights to murder and rape the locals will be abrogated, and fascist Yankee puppets, from Uribe the death-squad cappo to Kagame the death-squad cappo to Zenawi the death-squad cappo (does anyone else see a common thread here?)will fall from power, and, hopefully, do a Mussolini in some local square. The collapse of the Fourth, Yankee, Reich will be one of the great days for humanity, including the brainwashed American public. Let us just hope that it is not too late, given the parlous state of the planet’s biospheres.