Wednesday, March 30, 2011

Is the US economy collapsing under a surging federal debt level?

Guest Post by Neil Williams
The Chairman of the Federal Reserve is of the opinion that the warning level of the US national debt could have catastrophic consequences in the near future. Ben Bernanke has warned the Republican lawmakers about dire financial straits if the debt ceiling is not raised at the right time. He has implied that beyond a certain point of time, the US, as a nation will be forced to default on their national debt and this could have serious implications in the financial system. The US debtors are taking resort to the debt relief companies to pay debt off and regain a grip on their personal finances and also boost the US economy.

Coupled with this warning, he has also called for the Obama administration and the Congress to offer a credible economic plan that could help the nation to curb the future budget deficits. Though he has offered a moderately positive assessment of the future of the economy, he has also mentioned that the US economic recovery can only be possible with the aid of the Federal Reserve. While some Republican leaders are voicing their opinion for raising the debt ceiling ($14.3 trillion), some think that without effective spending cuts, it is pretty impossible to reduce the national debt level.

The US financial markets have still not shown much nervousness over the rising national debt limit. Though there has been too much political grumbling about the debt in America, yet financial analysts want the debt ceiling to be raised and avoid any kind of disastrous consequences. The chairman also called the lawmakers and asked them to issue hostage to the debate over how to rein in the budget gaps. The Congress must not only focus on the debt limit as the biggest issue that the US economy is facing but also concentrate on spending cuts and the tax issues so that US economy could progress towards betterment.

The rising US national debt – How does it affect the economy?

The budget deficit and the rising debt level are the two main causes that are restraining the economic growth. This is especially true during a recession. However, in the long run, the debt will have a damaging effect on the economy in the long run. Over the coming 20 years, there should be chances for the Social Security funds to be paid as the Baby Boomers retire. As this money has already been spent, this would mean higher taxes from the consumers as the US government rules out any option of borrowing from other countries.

The foreign holders of the US national debt will become more interested in investing in their own economies. Falling demand for the US Treasuries will lead to higher interest rates, thereby slowing the already fragile economy. Lessening of demand will also put a downward pressure on the dollar and this will in turn lower the demand of the dollar denominated securities.

Running an economy with large federal debt level is almost like driving with the emergency brakes on. This will further slow down the US economy and bar it from further growth. Thus, people are cautious about seeking help of debt relief companies and pay debt off to boost the economic level and their personal finances.


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