United States Debt

The U.S has borrowed trillions of dollars over the past decades to assist salvage its financial system, support its economic growth, and fund the two long wars. As results, this has led to severe impact on the U.S economy and its currency. According to Jonathan, the consequences of the government default would be cruel as based on economists’ views, including those from previous government and currently in the white house. More worse is the delay by the legislative in coming up with the debt ceiling which could also negatively affect the U.S economy.

According to Geithner, the congressional stalemate will propagate considerable ambiguity in the bond market therefore, increasing stress on interest rates. He also cautions that the rise would ramble the borrowing cost of the federal government in the future. To add on, there will be an increase in capital cost for the unstable U.S cash-strapped homebuyers and trade. Also, the future money will be diverted away from much demanded capital ventures like education, healthcare and infrastructure as a result of increase in interest rates. Jonathan’s correspondence implies that even a rise of twenty-five basis points on treasury yields, a burden of $500 million per month would be incurred by the taxpayers (Jonathan, 2011).

Another impact would be felt on dollar, whereby its value will decrease in comparison to foreign currencies due to a reduced demand for U.S treasuries. The currency depreciation will benefit the U.S exporters since there will be an increase in demand for their goods in foreign nations. Consequently, the same companies will also have incur increased borrowing costs from rising interest rates (Jonathan, 2011).

Vulnerability will be the desire to end the influence of the dollar as world’s reserve currency from the international community due to its continued unpredictability. According to the survey conducted by the Mckinsey Global Institute, 2010, establish that less than 20% of commerce executives expect the dollar to reign as the global reserve currency by 2025 (Jonathan, 2011).

According to Jenkins, the congress should evaluate on how to come up with significant budget cutting that will address the budget deficit and consequently, cutting the trade debt and investment instead of centering on the budget deficit. In targeting investments that stimulate productivity, innovation and competitiveness whereas reducing budgets elsewhere in the sector will only be the solution to resolve this. The investment deficit will be curbed by increasing productive investments. This will strengthen the exports, and create higher economic growth leading to closure of the budget deficit. The democrats and the republicans should settle their differences and come up with a solid mechanism to combat this debt crisis (Jenkins, 2011). . Another mechanism is to provide a long-term multi-decade debt plan on U.S, as demonstrated by Paul Ryan. This is whereby the U.S government is placed on a maintainable fiscal path through 2035. Pethokoukis say that their mechanism requires Washington to amass an average of 23.6% of GDP VS the post-world war II average of 18.5% (pethokoukis, 2011).

In summary, the policy makers should single out those activities that encourage productivity, competitiveness, and innovations which will, therefore, drive economic growth. In the other case, they should identify expenditures that expand the production capacity of the nation, increase future capital, and stimulate economic growth from the consumptive spending. Basing on the report by Jenkins,these mechanisms will assist in closing the three deficits.

References

Jenkins, Jesse. Taking on the Three Deficits. November 7, 2011. Web. December 13, 2011. http://www.itif.org/publications/taking-three-deficits-0

Masters, Jonathan. U.S. Debt Ceiling: Costs and Consequences. August 2, 2011. Web. December 13, 2011. < http://www.cfr.org/international-finance/us-debt-ceiling-costs-consequences/p24751>

Pethokoukis, James. Obama’s’s Vague Buffet Rule, a Political Ploy. September 19, 2011. Web. December 13, 2011. http://blogs.reuters.com/james-pethokoukis/