THE US DEBT CRISIS

The United States of America is regarded as one of the most productive and wealthy countries in the world, influencing practically every aspect of trade. But currently the national debt of US is skyrocketing.

US National Debt

The national debt is the amount owed to creditors by the government. The United States is now going through a hard stretch, with a $28.8 trillion national debt as of October 21, 2021. These high amounts of government debt will have an influence on economic stability, with implications for currency strength in trade, economic growth, and unemployment.

USA generally does borrow a lot, particularly in the last 20 years. Currently the national debt is at all-time high. The national debt is usually compared with the GDP of the economy using Debt to GDP ratio so as to understand how much the country is borrowing relative to its output. The US takes on more debt when the country needs more money it could be because of wars or for investments to stimulate the economy. This time it is due to Coronavirus pandemic.

The Role of US Treasury

The US Treasury collects taxes and spends them to fund the government, but it does not have complete control over how much tax is levied or how it is spent. The President and Congress decide how much to tax and how much to spend.

The US Treasury is in charge of money movement. When there is a fiscal deficit, the Government borrows to make up the gap and then sells treasury bonds to make up the difference. Treasury bonds are typically purchased by the general public, businesses, banks, and other financial institutions. But the majority of the debt is owned by the Federal government.

Interest rates have an important role in influencing the government's repayment status; low interest rates make borrowing easier while also making it less appealing to buyers. USA and Denmark are the two countries to adopt the concept of Debt Ceiling to restrict the borrowing after certain limit.

Debt ceiling is usually a limit to which a country can actually borrow, but US constantly raises the debt ceiling to pay for spending they already approached. If the debt borrowing comes to a pause this will have serious repercussions as the US government may default in paying the interest as promised.

What role does the $1 trillion platinum coin have in the current crisis?

A remedy has been proposed by several economists. As there is a loophole in the United States' coin minting legislation. While minting coins of other metals are restricted, minting platinum coins is completely unrestricted. As a result of this flaw, the following suggestion has been made.

The government mints a $1 trillion platinum coin and deposits it with the Federal Reserve. The US central bank then deposits $1 trillion in funds with the Treasury. This infusion of cash will aid the Treasury in navigating the debt ceiling situation. Many economists are against this idea as they suggest that this will lead to hyperinflation.

Any other country would have imploded, but given the US's prominence and size, things have been surviving but not sure for how long.

Thank you.

Regards,

R Ashwin (Section J),

Kautilya,

IBS Mumbai.