Jayden The largest single investor in the US economy is the US government. It may seem strange to describe the US government as an investor in its own economy, but that is because it has a great deal of influence on economic development. As you might expect, the US government also wants to get the highest possible return on its investment.
Politicians love their jobs and want to be able to do them all the time. But they need to win another election to be eligible for re-election. To be re-elected, they have to make their voters happy. To make their voters happy, they must create a strong economy for them and provide the social welfare programs they need.
To achieve all this, governments need money, and there is only one source of money in their hands: taxes. While an extensive and comprehensive social welfare system makes voters happy now, high taxes do not. So politicians want and are doing everything they can to grow the economy.
The economy grows, the voters are happy, and the coffers can be increased without raising taxes. It is far better for the government to pay 25% tax when you earn $100,000 than to pay 25% tax when you earn $75,000. However, all of this shows that it is in the politicians’ best interests to have the US government stimulate the economy, and you can count on them to do their best to achieve this.
The US government manages its investments in several ways. But, as we mentioned before, the two most important of these relate to forex, namely the national debt and the Federal Reserve rate.
The national debt is an interesting but often misunderstood indicator of the US economy. Debt has allowed the US economy to grow and expand at a respectable rate, but it also has exposed the US economy to higher risks.
In April 2022, the public debt of the United States was around 30.37 trillion U.S. dollars, around 2.2 trillion more than a year earlier, when it was around 28.2 trillion U.S. dollars. This is a truly massive figure. Some people think it needs to be noticed because a number this large is a big boost to the economy, and a number this large is dangerous for these economies.
Because there are so many different points of view, we thought it would be good to look at the national debt from a different perspective.
The US government is no stranger to the national debt. The United States first had a national debt after the War of Independence. During this war, a considerable amount of debt was accumulated by each of the initial 13 states in order to finance the supply of troops. After the war, the heavy debt caused the states to begin to cry foul. Meanwhile, the federal government was struggling to establish its political legitimacy and power, and Alexander Hamilton saw the states’ debt situation as a good opportunity to unify the states. He proposed that the federal government issue bonds raise money to pay off the states’ debts.
State debt allowed everyone who had ever fought together to form a nation and work together to pay off the debt. After a great deal of effort, Hamilton was successful and the national debt was born. Of course, it has never left us since then.
At the beginning of the 19th century, the US government came close to paying off the entire national debt, but the outbreak of the Civil War pushed the debt level to a new high of over $3 billion. And this was only the beginning of an upward trend in debt levels. With the advent of World War I, the Great Depression and World War II, the US national debt level climbed even higher. By the end of World War II, the national debt had risen to a level of over US$250 billion. As the US-Soviet Cold War escalated in the 1980s, the same goes for our “contribution” to the national debt.
In fact, the United States contributed US$1 trillion to the national debt every four years. By the 1990s, the end of the Cold War, a booming stock market and a stronger economy finally gave the US government the opportunity to pay off some of that debt. And for the first time in almost 30 years, we enjoyed a budget surplus.
However, the terrorist attacks of September 11, 2001, and the subsequent wars in Afghanistan and Iraq changed all that, and the US government released record deficit figures. You may have noticed that the national debt usually rises fastest during wartime. The US military is an incredibly expensive service, especially when it is “on the job”.
Many groups whose main purpose is to warn the world would have you believe that any national debt is harmful and dangerous. Although their views may be a bit radical, we have to admire their creativity. If you have ever been to Times Square in New York, you will have seen this creativity first-hand. The National Debt Clock, erected next to the square, shows the latest total national debt of the United States and the amount of national debt apportioned to each household. While this big clock is interesting, it doesn’t explain the reasons why the government is in debt and the real risks that come with a debt of this size.
The national debt is not dangerous simply because of its size. When you look at it another way, you see that it is only 65% of US GDP. If you look at this percentage in terms of your personal income and your budget, this means that the total amount you owe is equal to 65% of your output for the year. The national debt is 65% of GDP, a situation no worse than in other industrial countries. So, if the figure of $30.37 trillion is not dangerous in itself, then what is?
The national debt is dangerous, because as a nation, we are so dependent on it. The American way of life seems to be all about consumption and instant gratification. This is certainly not a problem if we have access to financing; but when that dries up, problems arise.
Holders of the national debt are individuals, institutions and other national governments. A significant proportion of the US national debt is held by other governments. If these foreign governments no longer have hope in the United States and decide to sell off their holdings of US Treasuries, it would be a catastrophic blow to the US economy.
The flow of funds would dry up and the US government would be left struggling to support itself. A foreign government decided to sell US Treasuries that would be similar to your mortgage company calling to tell you that they no longer want to hold the property you are mortgaging and that you need to find a way to pay off the loan immediately. You can imagine the chaos that would ensue.
But there are many benefits to holding such a high percentage of US Treasuries for foreign governments, the biggest is that it makes these countries care about the US economy. So, these countries that hold US Treasuries are happy to see the US economy doing well, so that the bonds they hold are guaranteed to be paid off. This is why investing in US notes and bonds has to be seen as a near-zero risk investment. Everyone is involved and no one wants to lose even a tiny bit of money.
