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A Debt Crisis in America: What It Might Look Like

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Washington, Feb 22, 2013 | comments
 Key Facts
  • The federal debt today is over $16.5 trillion. That’s larger than the entire U.S. economy.

  • The government’s debt is set to skyrocket in the years ahead. This debt will cause pain for families today and greater hardship when a debt crisis hits.

  • Once lenders lose confidence in the federal government’s ability to pay its bills, a debt crisis will follow. As a result, the cost of borrowing—for government and families—will increase, making it harder to make ends meet.

  • Instead of gradual, sensible reforms, a debt crisis will require sharp cuts in essential services. And it will especially harm the most vulnerable.

Federal finances run in the trillions of dollars and seem remote to the average American. The Federal government’s debt exceeds the entire output of the U.S. economy annually, and we have borrowed close to half of this money from foreigners.  The Federal government also has made future commitments through Medicare, Social Security and other programs and these commitments don’t currently show up on the government’s books.  
 
Despite this high level of debt, investors in the U.S. and across the globe view the United States as the safest place in the world to invest their money.  As a result, the Federal government pays close to nothing in interest to borrow money.  In addition, the U.S. dollar benefits from the U.S. economy’s strength and the perception of the U.S. economy and government’s financial strength.  And, families, workers, and businesses benefit through low interest rates on mortgage, credit card, and business debt.

Because of the relative strength of the U.S. economy and financial position of the government, we tend to take for granted the value of the U.S. dollar, which is the basis of everyday financial transactions in American lives.  If the Federal government began to have trouble borrowing money at low interest rates, a debt crisis could hit us. This is the dynamic that is currently playing out in troubled countries like Greece and Spain.  A debt crisis in America would not only be devastating at the macroeconomic level, it would also inflict acute pain upon families and businesses.

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