Why America Is In Debt?

From being the largest creditor in the world, the United States has now become the largest debtor in the world, with net external debt rising over eight trillion dollars, or over 40% of its GDP. The underlying cause of this deteriorating NIIP of US economy is the prolonged trade deficit with China and oil exporting countries. While oil exports have come down, Chinese imports continue unabated.
Why America is in Debt?
Source - Wikimedia Commons (https://commons.wikimedia.org/wiki/File%3AUS_Net_International_Investment_Position.png)

So you want to really know why the United States is in debt ?

It is not the credit cards, stupid! It is the import of cheap Chinese goods and the expensive oil sold by OPEC that has drowned the United States in external debt over a period of last two to three decades. While the US economy seems to have finally found a solution against the petrodollar cartel in the form of shale gas industry, it still remains largely clueless against the onslaught of Chinese goods that still overshadow the domestic US industry by virtue of the undervalued Chinese currency.

United
States has the Largest External Debt in the World

The most reliable measure of external debt is the ‘net international investment position’ or NIIP. It can be understood as the gap between the external financial assets owned by a country and its external financial liabilities. The assets as well as liabilities, owned or owed by the government as well as the private parties are included for the purpose of computing NIIP. The asset value and the foreign exchange rate of currency, both of which are rather volatile, affect the net investment position and tend to make it somewhat volatile. However, the persistent current account balance has a relatively more lasting effect on the indebtness of a country.

Till 1960s, the United States was the largest creditor in the world, indicating that it was the greatest investor in the global economy. In a little more than half a century, the situation stands completely reversed, with United States having acquired the status of the largest debtor in the world, with a total external debt of over $ 8 trillion dollars in 2016. To put things in perspective, the only other country in the world to have a net external debt of around a trillion dollars or more is Spain. Of course, the United States is the largest economy on this planet, and its external debt would also be in proportionally larger numbers, but then, the US external debt has now crossed over 40% of its GDP, which is far from a happy state


or one that would be expected from the leading economic superpower in the globe.

Causes of Rising US Debt

The primary reason of worsening NIIP of United States is the persistently rising US international trade deficit. Once threatening to cross the trillion-dollar mark, the US trade deficit has moderated somewhat, thanks to the rising input from the domestic shale gas industry, which has lowered oil imports and also brought down their prices in international oil markets.  

Meanwhile, the trade deficit with China continues abated, in spite of all the large sounds emanating from the US power centers. While this happens, Chinese foreign exchange reserves continue to accumulate to multiples of trillions of dollars. The world looks at awe, but there is hardly anything strange about it, when most of it is coming from the trade surplus with United States while the United States itself runs a deficit of something approaching half a trillion dollar every year.

Implications of Rising External Debt: Improving Economy Reassuring

Economists the world over are always worried about the health of US economy, for any downturn can be very troublesome for the fragile recovery of global economy that is just looking to come out of a lost decade. The improvements in US economy have had a positive affect over the market sentiment in the rest of the world. It has also helped in countries like China, which still derive a substantial trade from the US economy. Yet, the memories of the last decade have not yet been forgotten and the systemic vulnerabilities that arise from the global surplus of capital are still far from over. Assets are again threatening to initiate another cycle of inflation, and it may not be long before asset bubbles begin to grow again. The global economy is also not foolproof and still suffers from several vulnerabilities, particularly with lowering of the sovereign credit rating of China for the first time in several decades.



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