Easy Credit - Difficult Problems

Are bonds interesting? No! What about the national debt? We cannot afford to avoid paying attention to things we do not like or have little interest in knowing. The common form of national debt for people to recognize is U.S. Treasury bonds. People and organizations such as banks buy and hold bonds for several years and get their money back and add interest at the end. During this period, the government can use the money they collected to help develop the economy, provide public utilities, pay for wars, and then return the old bonds. A government can have a shortage of funds and it needs to borrow for different reasons, such as economic crises and wars. Credit has been easy and the national debt is due to the national government borrowing from citizens or other countries based on credit.

For example, the economic crisis brought big challenges recently. Due to some mistakes, many companies are facing bankruptcy, like Lehman Brothers, and therefore, more and more people lose their jobs. They choose saving money instead of spending since they do not have as much income. Less people spending or eating at restaurants, will cause some shops and restaurants to close and more people will become unemployed. This is a horrible circle. In order to solve this problem, government will help some big corporations, for instance, AIG, and create jobs for citizens. Of course, working on this, a government needs billions or trillions dollars. After spending all the money the government saved, they have to borrow money from others, such as people or other countries.

Another example is war. During a war, a government requires large amounts of money for the military. They must pay for soldiers’ food, clothes, health care, and so on. They cannot just pay once, but pay for it again and again since soldiers die, new soldiers join and need weapons, they need to be armed to protect and fight. The wars in Iraq war and Afghanistan are good examples. According to the National Priorities Project, by April 15, 2009 20:24 p.m., the total cost of Wars Since 2001 is $846,341,000,000 (National Priorities Project).

During Bush’s presidency, America has spent more than 800 billion dollars on wars already. Then in September 2008, the economic crisis exploded. The government does not have any choice and they must increase the national debt because of the recession. In 2007, the total value of foreign debt owed by the U.S. government was about 12.3 trillion dollars (Esfahani).

For people, national debt has a lower interest rate than their credit cards, for example, due to its smaller risk characteristic. However, people do get money back and also earn interest, which is different from stocks. A government always has short-term bonds and long-term bonds. Different bonds have different interest rate. Usually, longer time have higher interest rates. The reason is that the government needs people to lend money to them when the economy is weak and they need money to support it. If people just buy bonds for five years, when the bonds mature, the country’s economy may not be restored yet and they still do not have the ability to return the money or the interest that is owed. However, if people hold bonds for a longer time, the government will have enough time to earn money and pay back. That is why the interest rates are different.

Look at the situation now, the national debt is growing, which means government should pay more back in the future. Although the national debt grows, the amount of money still is not at its limit. Due to these two reasons, the American Federal Reserve decided to increase the money supply in the U.S. Since the supply of bonds is greater than the demand, the price of bonds will go down, eventually increasing interest rates. In addition, the value of dollar will decreases inflation is more likely to happen. In addition, if there are too many bonds, the excess will limit the government’s ability to finance the debt because people and organizations will not be as eager to buy government bonds.

Since, America is the biggest economic country and its credit is the best, many countries such as Japan try to buy many American bonds. As a result, the demand is more than the supply for overseas. This causes the price of bonds to go up and therefore, American bonds interests rates go down.

Inflation in the future is not good for our generation because it causes price of goods like gas and clothes to increase and people do not have the ability to buy as much. Then stores and shops will lose money, they cannot hire workers, and then they go bankrupt. A new vicious circle starts. Moreover, inflation has an effect on the interest of loans and a loan decreases will affect the profit of banks.

However, the American government has its own reasons for asking to increase the national debt. After the Federal Reserve increased the money supply, part of the new dollars could pay for national debt. In fact, bonds are harder to sell at a higher price than stocks because of the small risk. Therefore, this is one method that the government can adjust bonds market. At the same time, people can use the money to invest into projects and spend on goods instead of buying more bonds in order to stimulate the American economy.

There are valid reasons a government sells bonds and increases its national debt; this means the bond market influences the economy. However, credit has been too easy and the national debt is due to the national government borrowing money from citizens or other countries based on credit. Today, the United States faces the challenges of bad economic policies and hard times. The American government selling its debt might solve some current problems; however, it also causes further issues. We need to make better decision; we cannot wait any longer.

Works Cited:

Esfahani, Hadi. “The Global Financial Crisis and US Economic Stimulus Package”.
ACDIS. February 16, 2009. April 15, 2009.
http://acdis.illinois.edu/newsarchive/newsitemTheGlobalFinancialCrisisan....

National Priorities Project. April 15, 2009.20:24p.m.
http://costofwar.com/.