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Understanding The American Debt Crisis

June 4, 2012

The current U.S. national debt now exceeds $15.7 trillion dollars (06/12).  That amounts to a personal $50,000 bill for each American citizen (national debt divided by current population), which exceeds our annual per capita GDP by more than $3,000.  Although debt is not an uncommon phenomenon in this country, we haven’t had a deficit of this magnitude since the end of World War II, based on percentage of GDP (Congressional Budget Office).  Unfortunately, unlike the post-war recovery period, things are a bit harsher this time around.

The biggest difference between the U.S. financial burden of the 1950’s to 1990’s compared to today and onward is the diminishing funds of social security and Medicare.  Despite the costs of Vietnam, Korea, Space Race, and other expenditures, the national debt back then was essentially contained due to the baby boom generation’s massive tax surplus.  Today, that surplus has been depleted, tax revenues are decreasing due to the exodus of boomers from the workforce, and domestic population growth rate is extremely low (Demographic Transition). To make matters worse, the retiring boomers are now expecting returns on their lifelong investments, money that the government has completely spent.  Fundamentally, the only way the government can deal with this current burden is to borrow more money, done through interest paying bonds.  Majority of the bonds are owned domestically, but according to the U.S. Department of Commerce, Bureau of Economic Analysis, more than $5 trillion dollars worth is owned by foreign investors, with the largest being China and Japan, holding over $1 trillion each.

There are other elements that contribute to the country’s financial crisis besides social security, Medicare, and Medicaid.  The most obvious of which are the two wars in Iraq and Afghanistan.  Regardless of your opinion on the necessity of these conflicts, no one can argue the financial cost of warfare.  According to Brown University’s Watson Institute for International Studies, the current bill for the wars exceeds $3.7 trillion dollars, or approximately 23.56% of the current debt.

Then there is the 2008 financial crisis, in which sub-prime lending and financial leveraging by banks led to a global recession, destroying the market and costing many people their livelihoods.  This further burdened the system with another decrease in tax revenues and an increase in unemployment payouts.

This country is also experiencing a health crisis.  According to literally every scientific source on the matter, America is the fattest nation on the planet (I blame corn).  Obesity isn’t just an aesthetic issue, it’s also a financial one, as the cost to manage and treat conditions such as diabetes and heart disease is unreasonably expensive (Januvia pills, currently under patent, cost nearly $300 a month).  America’s healthcare coverage also plays a role in our debt, but this controversial issue should be discussed independently.

America has a global trade deficit.  There are two subject areas to focus on.  The first has to do with our culture.  America is a consumer nation.  We love stuff and we love to buy stuff we can’t afford! That’s about as layman as it gets.  The second area has to do with what I like to call an “industrial transition.”  In-a-nutshell, as economies advance, they will naturally shift from a primary-focused industry (agriculture, mining, fishing) to a secondary industry (manufacturing, construction), to eventually a tertiary/quaternary (services) industry.  As we know, manufacturing is practically on life-support in the United States.  Although it is justifiable to blame politicians, the World Trade Organization, NAFTA, China, and/or business tycoons, the fact-of-the matter is, decline in manufacturing is part of a near-natural progression rooted in inflation, improvement in education, and overall way-of-life for industrial societies.  The real problem is that manufacturing has declined a bit too much in America.  According to the economic base model for industrial societies, for every one basic worker (mainly manufacturing worker), two non-basic workers are needed to service them.  Without any empirical data (theory), it certainly feels more like it’s two-and-a-half to three non-basic to one basic in America today.  We have become too technological and too service based.  This is a problem since most services (i.e. haircuts) can’t be traded internationally.  The U.S. basically imports significantly more than it exports.  To add insult to injury, many of those quaternary service and high-tech jobs are now being out-sourced overseas, as well.  Partially it has to do with a reduction in cost to companies, but it also involves the country’s lack of qualified workers.  Most Americans, such as me, tend to study the liberal arts and the social sciences in college, but those fields are not where jobs are.  STEM (Science, Technology, Engineering, and Mathematics) is where the demand is (remember: America is highly service and technologically based).  So essentially, America lacks the proper workforce to occupying all the available STEM jobs, therefore forcing companies to seek labor overseas- imagine that irony.  This situation is documented in 2008, when Microsoft CEO, Bill Gates testified in front of congress with this very concern.

Then, of course, there is everything else…

Our current financial debt crisis is dramatically direr than any previous. Changes must be made, so prepare for our standard of living to decline in the coming decades.  The rationale for this post is to hopefully get you to understand that despite our hatred for budget cuts, they are necessary.  The debate, then, is to decide what to cut and what to pardon.  Is Wisconsin Congressman Paul Ryan’s (a rather handsome fellow) proposed cuts to Medicare and Medicaid a good idea?  That’s up to you to decide.  Do you think Obamacare is the path to fixing our healthcare problem?  That’s also up to you.  But again, regardless where the cuts come from, we need to start supporting some monetary policies.  We cannot keep spending phantom capital.  Let’s buy less, work more, pay our taxes, and collectively solve this crisis in a civil manner.  –Ping Zhou

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