| The Gravity of the Foreign Debt Essay Good thesis writing Essay done for you
The financial environment of the United States of America has always been a stable environment. In contrast to the countries of the European Union, whose financial capacity has always been vacillating under the extensive pressure of the external and internal economic factors, the situation in the USA has been relatively stable since the Great Depression. Even the financial recession that took place in the recent decade did not stagger the financials capacity of this country significantly. Primarily, in contrast to the majority of the European countries, Greece and Spain in particular, the unemployment rates in the USA remained relatively small and massive protests of the outraged sacked employees are not reported to take place.
However, whilst the European countries employed the internal leverages and internal financial resources (except for the Southern European countries), the United States of America seem to employ the strategy of the foreign aid involvement. In particular, the United States of America annually borrows from various international financial institutions and other members of the international financial community. Among the main United States lenders are the Russian Federation, the People’s Republic of China and the International Monetary Fund. The ratio of between the GDP of the USA and the external debt of the USA is reaching the critical point. The vast number of the leading scientific and political analysts vigorously advocates for the idea that when the debt exceeds the GDP of the United States of America, the country is likely to collapse and the entire economic system of the United States of America is likely to collapse. This paper is aimed to evaluate the strategic gravity of the United States external and internal debt, and to discuss the possibility of the United States of America financial breakdown resulting from the excessive borrowing.
It is evident that alongside with the rise of the GDP, the gross debt increases simultaneously.
The Reasons of the Debt Origination and the Measures Employed by the US Government to Curb the Debt
This section of the paper examines the reasons of the external and internal debt formations. Considering the fact that the financial flows, which formulate the debt, cannot be identified with 100% accuracy, the list of the debt-generating factors is in-exhaustive.
Factors relating to internal environment:
1. Healthcare reforms undertaken by the administrations of Barack Obama and George Walker Bush. During the presidential campaigns of these candidates, the political programs of both presidents included extensive formulation and implementation of the healthcare policy. In accordance with the healthcare acts, in case the healthcare-related issue arises, the state budget guarantees that all financial issues will be settled. The fiscal organs of the United States guarantee the disbursement of all expenses would be connected with the treatment of the United States citizen. In accordance with the recent surveys conducted by the fiscal organs, the guaranteed payments can exceed 2000% of the obligatory healthcare payments exercised by the citizens.
2. Discretionary spending of the United States government institutions is not regulated accordingly. The same problem exists in the private sector of the United States economy. To be more exact, a convergent scholarly and political opinion is that the financial planning of the public and private entities of the United States of America is often not consistent with the financial capabilities of the country. If the financial appetites are not satisfied by the present financial capabilities of the state, the USA will demonstrate a clear trend to borrow. The state borrows from other states, the companies, and the corporations borrow from the banks, the banks in their turn borrow from other banks. Eventually, the cash flows are reported to have arrived from abroad. This way, 67% of the aggregate United States debt is formulated. Nowadays, the government tends to introduce bills prohibiting excessive borrowing
3. Another hot issue in the United States of America is the tough financial situation on the local level. To be more exact, local finance is reported to be both regulated and managed improperly. Besides, the repercussions from the global financial crisis have not been coped with smoothly in the states. Moreover, it is overall stated that the local borrowers are demonstrating a clear trend to borrow from another states (not often the neighboring ones) and very often public and private institutions borrow internationally to cope with the rising budget resources deficit. In particular, it is known that the aggregate budget deficit for the state of Texas has already reached 10%, and in order to cope with the growing deficit, the public and the private institutions of this state are clearly demonstrating their trend to refer to the international lenders and their local colleagues.
When the outlays of the US exceed the revenues, it is highly possible that the debt crisis will arise.
Factors of the External Environment and the Solutions of the Major Macroeconomic Schools
a) The Activity of the International Investors
In accordance with the number of the recently published reports, it is becoming evident that about 56% of all the investments which are done to the internal economic environment of the United States of America come from overseas. This way, the internal participants of the industrial cycle in the United States of America became intrinsically dependent on their quasi borrowers. The followers of the Keynesian approach to the comprehension of the international economy are vigorously advocating for the idea that all foreign aid shall be balanced and shall not exceed 10% of the entire internal turnover, due to the fact that the repercussions of the overbalancing can, in fact, be detrimental for the entire business environment of the United States of America.
b) The Crisis of Overproduction
The biggest external contributor to the increase of the public debt in the United States of America is the constant increase of the production of goods in the Unites States of America. In accordance with the fundamental principles of economy outlined by the scholars of the new classical school, it is becoming more and more evident that the commodities manufactured by the local producers in the United States of America are no longer in demand, not overseas nor nationally. However, in order to support the local manufacturers and hoping to encourage the local business environment, the government of the United States of America and the private corporations are doing the same operations. The unwillingness of the trade partners to purchase the output of the USA manufacturers, and therefore, the impossibility to increase the accrued revenues lead the companies to refer to the means of finding alternative sources of company capitalization. Therefore, the best alternative is to refer to the foreign financial aid, and to seek investments and loans in order to reach the desired level of financial stability. The Keynesians anticipate that if this method of business conduct will remain, it is highly predictable that very soon the companies will be forced to re-orientate all their activity to the procedures aimed at obtaining foreign financial aid. Unless the next financial tranche is obtained by the United States of America, the effective conduct of business within the jurisdiction of the country is hardly predicted to be successful. Therefore, it can be easily assumed that if the financial calamity happens in Europe or another country, which is among the most prioritized United States lenders, the country is likely to go bankrupt.
c) The Extensive Loans Provided by the United States of America to the Developing Countries
Alongside with being the most rapacious borrower, the United States of America contrives simultaneously to be one of the most lavish lenders. In aggregate, the programs aimed at providing foreign aid for the number of the developing countries are estimated to reach $ 40 billion annually. Considering the inconsistent character of the debt repayment by those countries and favorable loan agreements conducted with them, the United States of America Federal Treasure usually does not expect to have those financial resources to return in less than 15 years. The new classical economic school is fervently advocating for the approach under which the United States has to reconsider their foreign aid strategy, otherwise, because of the support of the foreign economies, the own economic development of the country is seriously endangered.
d) Feeble International Fiscal Policy
The leading economic scholars, as well as their business colleagues, numerously report that the in Untied States of America is more than reluctant to proceed with the debt collecting operations. In other words, the adherents of the Keynesian school have calculated that approximately 40% of the loans procured by the United States of America are never returned. Therefore, the budget deficit gradually arises, and the country gradually becomes impossible to fill in the deficit gaps with the help of the internal resources and external financial bases of the country. Therefore, the only remaining strategy for the country remains the practice of foreign borrowing. This is the way the debt is accumulating and the liabilities of the country become bigger in quantity and quality.
Considering current economic situation on the market, it can be recapitulated that, although the United States of America debt is 102% of its Gross Domestic Product, nothing fatal has happened. Moreover, irrespectively of the critical opinion delivered by the adherents of the Keynesian economic school, the United States of America is likely to weather the forthcoming storm. The main reason of the countrys fiscal stability is the fact that abundant financial resources are at the disposal of the Federal Reserve System.