Debt Time Bomb, Is It an Impending Death of Pax Americana?

December 4, 2009 · Filed under Current Issues · Tagged , , , , , , , , , ,

<High Public Debt, is it an impeding death of Pax Americana?>

According to U.S. National Debt Clock, United States has approximately 12 trillion dollars of public debt, and the debt is increasing by one hundred-thousand dollars every second. Once I saw this I thought that it was just another phishing website or conspiracy website which tries to fool people with false information. So I thought this specific number was a fake. However, I have mistaken it for a false information. It actually has a data graph from US government’s official website (1).

As you see in the graph, the debt will increase and increase until it is 100% of US’ GDP. It will be not long till it goes over 100%. Now, many people would be seriously concerned about this problem by now. Many people will wonder, “How has the biggest economy in the world got an exponential amount of public debt?” When I have googled this problem, many people posted that the ‘War Against Terrorism’ has caused this. I remember looking at a graph of US public debt skyrocketing right after the year 2001 when the President Bush declared ‘War Against Terrorism.’ Therefore the prolonged exhausting war of Iraq and Afghanistan has certainly been a part of the cause. As the result of these wars, it has debilitated US economy. This could be noticed from the recent news reporting, US dollar fell to 14-year low against the yen.

For this blog post, we will look into following questions about exponentially high public debt: 1) How has US managed this high public debt over 10 years? 2) What is the relationship between this debt and the news “US dollar fell to 14-year low against the yen“? 3) What will happen if US no longer can sustain this burden?

How has United States managed to even ‘function’ as a state with this sky-scrapping public debt? There are several answers to this question. First of all, many countries are ‘giving’ billions of money to United States to support this exponentially high public debt. You might think, “Are those countries stupid enough to give away money to United States for nothing?” However, these countries are obviously not stupid to give away money to United States for nothing. It is because of the inevitable economic structure.

United States has the key currency, dollar, which is used widely around the world to buy, sell, and to settle economic problems. US Dollar is used as official currency or de facto currency in many countries. United States also has the strongest, biggest market in the world. With key currency and strong economy, United States is well trusted in the world. This trust allows US to cover up their public debt by issuing their own security, usually called government bonds. It is a governmental promise that any individual or nation who buys US treasury securities will be payed back in the future.

Basically, United States can borrow money (issue treasury security) based on its credit/trust and pay the debt by this money. So the public debt accumulates as US issue treasury security to countries and repaying the countries with the borrowed money. This creates a ‘vicious circle of public debt.’ Or other might call it ‘the ultimate economic motor that never stops.’ United States is actually enjoying this cycle as they are spending and letting the other countries do the paying.

The countries are in an inevitable structure where they have to buy US treasury. For example, Japan is one of the major foreign holder of US treasury security. Also Japan has the second most US dollar as a foreign country. The reason why Japan bought lots of US treasury security is that Japan’s major exporting country is United States. Japan gets payed in US dollars as they sell their product in US market. However, US manages to ‘take away’ the money by inflating US Dollar. For example, lets say that Japan earned $100 by selling a product in US. However, United States issues another $100 and causes inflation. The $100 Japan earned is now not as valuable as it was before United States issued $100. So Americans are basically spending and spending, and other countries are paying and paying for United State’s spending.

The following is a simplified graph of this accumulation of public debt.

The Pax Americana of spending and spending could come to an end with various factors threatening US economy.

Firstly, US dollar fell to 14-year low against the yen is considerably a big threat. As Japanese Yen has rose and US dollar fell, Japanese exporters are very frustrated as they cannot export their products. So the Japanese government is trying to sell its dollars stored up in the bank to cause depreciation of Japanese Yen. However, if they do this, sharp depreciation of US dollar will occur causing US dollar to value no more than a piece of paper. So the US government is pressuring Japanese government not to intervene in the foreign exchange market.

Counterfeit “Supernote” and the Real Dollar

Secondly, North Korea has printing facilities for printing counterfeit currency called ‘supernote.’ Supernotes are counterfeit currencies that are very difficult to figure out even with latest-technology equipments. Supernotes could be a threat to US dollar’s position as a key currency because it could depreciate the US dollar. I believe that this is the problem that US should be worried about not the nuclear bombs. If North Korea decides to release billions dollar worth of supernotes into foreign exchange market, US dollar will worth nothing in matter of days which is much destructive than the nuclear bomb that North Korea has. If billions of supernotes influx into the foreign exchange market, US dollar will lose its position as a key currency and other currencies such as European Euro or Japanese Yen will replace that position. As US dollar loses its position as a key currency, the United States government would not be able to issue a treasury security to raise the fund.

If United States cannot long sustain the public debt, United States as a nation could go bankrupted. Obviously, United States will not be able to pay the public debt if they cannot issue a treasury security if the dollar loses its position as a key currency. Also there is a possibility of war as World War I and II occurred because of economic reasons.

In conclusion, United States should better stop borrowing money and using the as an economic stimulus package. They should slowly get rid of the deficit spending and adjust their balance in order to decrease exponentially high public debt.

Little Reflection: I personally thought that this blog post was unorganized. I had some understanding of the situation, however, it was not firm nor clear. I actually understood more about the situation as I wrote the blog post. So, I felt this blog post was little bit unorganized in what I wanted to say.

Resource:

(1)GPO Access: US government’s official printing office. It has official data of US budget 2008.

(2) US Department of Treasury: Pie graph about foreign holders of US treasury security

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9 Responses so far »

  1. 1

    Jessica said,

    December 6, 2009 @ 7:14 pm

    Wow. This is more of a personal research than a post, but nevertheless, this is Perfect. You mixed Economics with Business nicely. The pictures and the charts really helped, and this post taught me many things about what is going on with the exchange rate; moreover, your possible solutions are reasonable. As for your organization, I think you should leave it this way, only because of one thing. Reading this makes the reader see things your way. And besides, readers are human beings as well, and we tend to understand complicated situations better if a post or whatever is written in an honest and… well, in this manner. We can see how you are struggling to convey this matter that you are an expert on, to the readers, and I think it is our job as a reader to accept it and understand what the writer, or you, in this case, is saying.

    If you can do me a favor, could you please change the first picture in this post? I really do understand your purpose in having it there. Yes, US is diminishing by the minute, but something less violent and painful is preferable. For a patriotic student, such as I, it is somewhat disturbing. I hope I am not asking for too much, and I thank you for your understanding. If there is no other way to visually describe the situation, I will be all right with this.
    ~Jessica

    Reply
  2. 3

    Jessica said,

    December 8, 2009 @ 8:53 pm

    Thank you for changing the picture! I truly appreciate it 🙂

    Reply
  3. 4

    James said,

    January 21, 2010 @ 12:53 am

    America’s national debt is going to increase with stimulus pact that the Obama administration is planning for. This could be a potential and fundamental obstacle that will hold US’s economy back. The second largest economy Japan has the same problem also. Actually, Japan has 200% national debt compared to its GDP. Japan and US are in for bankruptcy if they do not reduce the rate of deficit.

    Reply
  4. 5

    Mika Koponen said,

    May 23, 2010 @ 9:57 pm

    I have tried to grasp this matter somehow. I hear this on the news all the time, but yet have been wondering, what is the deep down issue here. I understand that is is a complicated matter, but this post made it a lot clearer of what is going on and what is cause. Thank you very much for posting this!

    Reply
    • 6

      11kimsa said,

      May 23, 2010 @ 10:29 pm

      Hi, I am glad that this post had at least made any sense to somebody. I thought that I didn’t make my point clear enough on the post, but I am happy to hear that it has actually helped your understanding of united states debt. Thank you again for visiting my blog and commenting on it 🙂

      Reply
  5. 7

    Plan to cut down US Public Debt failed « Sang's Economics Blog said,

    October 18, 2010 @ 9:45 pm

    […] blog post is an ‘add-on’ to the original blog post: Debt Time Bomb, Is It an Impending Death of Pax Americana? Possibly related posts: (automatically generated)Fed Boss: More Securities Buys Could Help […]

    Reply
  7. 9

    mrs truth said,

    December 31, 2010 @ 5:55 am

    sadly the national dept is tapping on 14 trillions back… to add to the situation the interest on the dept is 10 trillion… so we really owe 24 000,000,000,000.

    Reply

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