Our Unsustainable Debt

Reason Magazine has an article in the June issue about United States debt.

America’s financial situation is unsustainable. In 2009 the federal government spent $3.5 trillion but collected only $2.1 trillion in revenue. The result was a $1.4 trillion deficit, up from $458 billion in 2008. That’s 10 percent of gross domestic product, a level unseen since World War II. Worse, the Congressional Budget Office (CBO) projects that we’ll be drowning in red ink for the foreseeable future, with annual deficits averaging $1 trillion during the next decade.

While these figures are dramatic, they pale in comparison to what the federal government owes foreign and domestic investors. According to the CBO, in 2009 America’s public debt reached $7.5 trillion, or 53 percent of GDP, the highest it has been in 50 years. In 2010 the debt will cross the 60 percent threshold, a level at which many economists believe a country is putting itself in financial peril.

The money used to pay our debt comes from the savings of Americans.  There will soon not be enough money from the savings of Americans which will mean that our government will increasingly have to look to foreign investors to loan us money (buy our bonds).  This is not a good financial situation for the US to be in.  We will not be able to sustain it over time.

Fiscal prudency would require that the US start generating budget surpluses to repay our debt.  Following the course laid out by the current administration the future looks bleak.  This administration has plans to run the US debt up to unprecedented levels rather than reducing it.

Probable result of this activity: significant inflation, weakness of American currency against other currencies, an extraordinarily large amount of our gross national product going to service the huge debt burden, loss of confidence in America, inability of our economy to generate innovative new industries, inability to finance new construction and a host of other economic maladies.

We need to fire Keynes and hire Hayek as soon as possible.

Read the whole article in Reason Magazine.

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