Currently the US is now over $15 trillion in debt.
[1] The national debt has now gotten to the point where it is larger than US
government revenue and is now unpayable. In response to this crisis, many in
government have been arguing for austerity measures, yet they have not been
using that actual term, rather there has been an argument for deep cuts in
social spending, with one example being Paul Ryan’s budget proposal which
targets mainly the poor and elderly. A debt crisis may very well lead the US to
being forced to choose from two poisons, austerity on one hand and default on
the other.
Austerity measures are currently being pushed by the
intellectual elite. Niall Ferguson argues that the main problem in Western
democracies “is the huge debts we have managed to
accumulate in recent decades, which - unlike in the past - cannot largely be
blamed on wars” and poses the question “[W]ould young people be wise to
encourage politicians to pay-off national debts now to avoid an even more
miserable financial future?” [2] In the US, Pacific
Investment Management Co.’s Neel Kashkari, states that the US should “stop
kicking ‘the can down the road’ and implement fiscal austerity measures so the
economy can fully recover from the financial crisis.” [3] While Ferguson states
that the debt “cannot be blamed on large wars,” the facts prove him to be incorrect
as during the Clinton Administration there began a decrease in the national
debt and ended with the US being in the black. [4] When President Bush came in,
the US went back deeply into debt and this debt increase can be blamed mainly
on the Afghanistan and Iraq wars.
The arguments for austerity, while they
may be many, are nullified by the fact that the International Monetary Fund,
the biggest advocate of austerity for so-called third world countries (and
increasingly for many first-world European countries), has admitted that
austerity only hurts income and worsens long-term unemployment. [5] In other words,
austerity only makes a bad economic situation worse. Yet, this begs the
question, if austerity doesn’t work, then why are people arguing in favor of
it? This question can be understood by examining the situation from the
perspective of the banks. Austerity measures result in large amounts of
privatization and thus allow for banks to buy up essential services such as
water and electricity systems for dirt-cheap prices and then the banks can make
large amounts of money from the perpetuity of state assets. Thus, the banks
that gave the loans will then be able to recoup the amount of the loan and then
make much more money.
Yet, austerity has more effects than
just those the IMF listed. Austerity also produces “falling wages and a broadly
recessionary environment that can last for decades,” [6] and can result in the
near or total economic destruction of a nation. In addition to this, one only
need to look at Greece which used austerity measures to see just how
ineffective they are. “[T]hose massive cuts in spending have caused the Greek
economy to contract, reducing its ability to pay off its debt.” [7] Thus, there
is no hope that austerity will work to aid America’s current debt woes as it
will only create an even worse situation where it is that much harder to lower
the debt.
Concerning default, that would be even
more catastrophic than austerity measures. While one may scoff at such a
notion, the reality of the situation is not unrealistic as just last year the
US almost defaulted while the House of Representatives battled over whether or
not to raise the debt ceiling. [8] A default on US debt would have multiple,
interlocking effects. Firstly, a default would trigger a high degree of risk
among US treasury which would result in the disruption of many different types
of contracts and all types of transactions as well as the destruction of
private credit. [9] Such a crisis would force the Federal Reserve to either “step
in and provide an enormous amount of credit directly to households and firms”
or “stand by idly while GDP fell 20 to 30 percent.” On top of all of this, the
US economy would be hit even harder by the fact that
With the private sector
in free fall, consumption and investment would decline sharply. America's
ability to export would also be undermined, because foreign markets would
likely be affected, and because, in any case, if export firms cannot get
credit, they most likely cannot produce. [10]
Thus, default will only bring about a near or total
collapse of the economy.
The US, if it wants to get its economy back on
track, will have to reject both default and austerity. The first step it could
take is by making the bankers pay for the economic crisis that they created
rather than forcing the burden upon the populace.
Endnotes
1: US Debt
Clock, http://www.usdebtclock.org/
2: Niall Ferguson, “Viewpoint: why the
younger generation should embrace austerity,” BBC, June 16, 2012 (http://www.bbc.co.uk/news/world-18456131)
3: Tom Keene, Catarina Saraiva, “U.S. Needs
Austerity to Reset Economy, Pimco Official Says: Tom Keene,” Bloomberg News, June 8, 2012 (http://www.bloomberg.com/news/2011-06-08/u-s-requires-austerity-to-reset-economy-pimco-s-kashkari-says-tom-keene.html)
4: US National
Debt by Presidential Term: Per Capita and as Percentage of Gross Domestic
Product, http://www.skymachines.com/US-National-Debt-Per-Capita-Percent-of-GDP-and-by-Presidental-Term.htm
5: Alexander Eichler, “IMF Report: Austerity Measures
Hurt Income, Make Long-Term Unemployment Worse,” Huffington Post, September 13, 2011 (http://www.huffingtonpost.com/2011/09/13/imf-austerity_n_960199.html)
6: Rob Urie, “Who Benefits From Austerity
Politics?,” Counterpunch, November
18, 2011 (http://www.counterpunch.org/2011/11/18/who-benefits-from-austerity-politics)
7: “End of the line: What a Greek default means,” CNN Money, June 17, 2012 (http://finance.fortune.cnn.com/2011/06/17/end-of-the-line-what-a-greek-default-means)
8: “US ‘almost out of time’ for debt deal: Obama,” Dawn, July 30, 2011 (http://dawn.com/2011/07/30/us-almost-out-of-time-for-debt-deal-obama)
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