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Have you ever wonder how federal (U.S.) debt surpassed $26 trillion? Part 4

  • Wisdom
Reading Time: 6 minutes

Please read …… Part 1, Part 2 and Part 3 before starting reading part 4

Although the amount of government debt does not increase from 1945 to 1960, U.S. GDP increase from 200,000,000,000 USD (200 Billion) to 500,000,000,000 USD (500 Billion) . This means the ratio of government debt to GDP has decreased by around 50%. This is due to the world currency of dollar have successfully caused a lot of countries in the world to bill their export products in the dollar. The swelling of the U.S. economy has caused an illusion that government debt has decreased. (ratio of debt to GDP decrease)

From 1960 to 1975, although the U.S. lost in Vietnam War, government debt still increase to 500,000,000,000 USD (500 Billion). Needless to say, all the expense of war is collected through government bond. At the same time, John F. Kennedy proposes Welfare state (invest government income into the construction of social welfare), he does not intend to pay out the government debt at all. The economic growth of the U.S. keeps on growing, its GDP reached 1,500,000,000,000 USD (1.5 Trillion). A comparison of debt to GDP has decreased to 33%. At the same time, there is a big incident that happened in the world-Gold Standard that doesn’t apply to USD.

This caused USD can increase or decrease its value on its own without limitation from any party. (due to collapse of Bretton Woods system) Decreasing the value of USD is equally to decreasing the value of government bonds held by all the buyers. For example, 1 USD can buy 10 apples initially. After the value decreased, 1 USD can only buy 9 apples. It is the same as dilute the assets(bonds) of the buyers, and a method to renege on debt.1973 oil crisis caused the U.S. economy to decline. Ronald Reagan (40th President) use the right of Federal Reserve (increase and decrease interest rate) to exploit the economy of Latin America. Also, they spent an amount of money to compete with the Soviet Union. All these actions have caused the government debt increase from 500,000,000,000 USD (500 Billion) in 1976 to 2,600,000,000,000 USD (2.6 Trillion) in 1988, which exceed 50% of GDP again. 

Facing such a huge amount of money, George H. W. Bush (41st President) manifested that he would not apply any new tax collection and will reduce the government debt to get elected. However, when he (Bush) retired in 1992. Government debt has reach 4,000,000,000,000 USD (4 Trillion) , which is 63% of GDP.

If you are wondering why the debt suddenly increased so much. Here is the answer, all this money has been used in the Dissolution of the Soviet Union and Revolutions of 1989. Now, the U.S. has become the only strong nation that still standing in the whole world at that time. The increase in debt is totally worth it.

After that, the economic policy proposed by Bill Clinton (42nd President) caused an increase in government income residual starting from 1998. However, Clinton never intends to pay the debt using the government income residual. He gives back all the money to the citizen in the form of welfare. Following by 43rd President, George W. Bush should have a great history during his management due to government income residual. Out of the blue, September 11 attacks occurred and the U.S. responded with War on Terror (Afghanistan and Iraq). All these costed at least 4,000,000,000,000 USD (4 Trillion) . However, Bush still implement a policy of reducing tax during his management.

The story continued with famous Barack Obama (44th President). As he take place of president, he has to solve the 2008 Subprime mortgage crisis. To recover the economy, Quantitative easing (QE policy is implemented and caused a surge in government debt around 2,000,000,000,000 USD (2 Trillion). At the same time, Libyan Civil War (2011) also occurred. The reason why Obama is loved by the people is that he keeps on the tax reduction and propose a lot of medical policy to improve the welfare of the country. All these policies and wars have caused government debt to reach 19,947,000,000,000 USD (19.947 Trillion) when he retired from the president. Government debt again exceeds the percentage of GDP.

Until 2020 June 13th, government debt has exceed $26 trillion (26,000,000,000,000) . Debt increased around 4,000,000,000,000 USD (4 Trillion) for the first half of 2020. If we look back in the financial report of 2019, the U.S. spent 574,600,000,000 USD (574.6 Billion) just to pay the interest of the bond. This shocked Donald Trump (45th President). Also, compared to GDP in 2019, the percentage of government debt is 108%. 

Due to Covid-19, S&P Global Ratings has predicted that GDP will decrease by 5% in 2020. If a new government bond is released in the second half of 2020, government debt will reach 150% compared to GDP at the end of 2020. This is the same as the situation faced by Greece 5 years ago of almost facing bankruptcy. However, we cannot compare Greece with the U.S. because the U.S. has a lot more control in terms of the world economy. Let us have a look at Japan, its debt has reached 239% compared to its GDP, but they are still surviving and keep improving. We need to know that the expired date for all government bonds is different although the sum amount is huge. Considering paying the average interest for every year, the amount does not seem so terrifying anymore. 

The longest period of the bond is 30 years. Recently, Trump suggested distributing a bond that has 50-100 years period.

Move on to the conclusion, we cannot only see the amount of debt. More importantly, we should observe the payback ability of a country. If a country have strong background and ability to pay back the debt, it can still survive even when the amount of debt is increasing. However, when it comes to the day that government income of the U.S. can no longer sustain the payback amount of interest and debt of that year…Can you imagine what would happen to the world?

If we see current U.S. policy (tax reduction and bond distribution), paying clear the debt is not possible. Even the upcoming president is willing to pay the debt, he does not have enough ability to do so since the debt is too huge.

So when do you think this debt bomb going to explode, 30 trillion, 40 trillion, or even 50 trillion? No one knows.

We hope that this post is insightful for you. Good luck and all the best!

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