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The next international “debt crisis” is in North America

By Keith Suter - posted Wednesday, 30 June 2004


Military power comes from the wallet. A country is not rich because it has a large defence force – but it may have a large defence force because it is rich. There is a growing concern about what the increasing US national debt will do to the nation’s ability to influence world affairs.

The current size of the national debt is almost US$7 trillion (that is seven million, million dollars). This is a sum of money beyond the understanding of most people. For example, if a person spent a US$1 million a day for every day since Jesus was born, then it would take until about the year 2737 to spend just the first trillion dollars. The US National Debt is about seven times that amount.

The national debt started in 1791 and it was US$75 million. In the 1830s, the national debt went down to its lowest ever level: US$37,513. This was due both to President Andrew Jackson being very frugal and to the US government selling land for development purposes.

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Generally speaking the national debt has gone down in times of peace and gone up in times of war. The national debt increased by 21 times in World War I and six times in World War II. The longest sustained period of debt reduction occurred after the Civil War (1861-5) to 1893, when the US government ran a budget surplus every year and cut the debt to about a third of initial value. This resulted in more money in circulation for private expenditure and so contributed to the booming US economy. By the beginning of the 20th century all this growth meant that the US had become one of the world’s main economies.

The Depression of the 1930s was another turning point because the national debt started a dramatic increase even though there was no war. The US government was spending its way out of the Depression, such as through the creation of roads and other public works. Then the US ran into all the financial problems of World War II.

In the aftermath of the war, the US embarked upon its biggest period of economic growth – as did most of the rest of the world as it recovered. For two years during the eight years of the Eisenhower government in the 1950s, the US government even ran at a surplus.

From the 1960s, US governments started to fall back into increasing the national debt. For example, the Vietnam War was politically unpopular and could not be financed from traditional methods (compulsory saving and increased taxation) and so the government borrowed to pay for it. The Reagan Administration (1982-88) had the largest military build-up in peacetime US history and this added to the national debt. The late President Reagan left office with a budget deficit larger than the combined total of his 39 predecessors.

By the time of the Clinton Administration (1992-2000), the Cold War was over and the President was reluctant to get the US involved in further wars. Additionally, the US economy was booming again. In the late 1990s, Clinton was speculating on what could be done about the first lot of budget surpluses since the Eisenhower Administration. In June 1999, Clinton said that if the current rate of annual government budget surpluses could be maintained, then the entire national debt could be paid off by 2015.

Reducing the level of annual government budget deficits was one of the Clinton Administration’s greatest achievements. It ran four consecutive budget surpluses. In May 2000 Clinton announced the largest paydown on the national debt in US history. The national debt was US$2.4 trillion lower than it was projected to be when he entered office in 1992. He said that the US could “pay off the entire national debt by 2013 for the first time since Andrew Jackson was president”.

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But that optimism has now gone. President George W Bush has increased the annual government deficits by both introducing tax cuts and raising defence expenditure. The War on Terrorism and the cost of rebuilding Iraq are adding to the national debt. The US government is now back with record government budget deficits.

We hear a lot about the Third World’s “debt crisis”. But the real crisis is the US’s own national debt. China – the emerging economic super power and an American creditor – may have to instruct the US to stop living on credit and start living responsibly. The Americans reined in Britain after World War II. Now the Chinese may have to rein in the Americans.

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About the Author

Dr Keith Suter is a futurist, thought leader and media personality in the areas of social policy and foreign affairs. He is a prolific and well-respected writer and social commentator appearing on radio and television most weeks.

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