Munich Personal RePEc Archive

U.S. Government debts, a dangerous cocktail of borrowing, spending and inflation levels

De Koning, Kees (2021): U.S. Government debts, a dangerous cocktail of borrowing, spending and inflation levels.

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Abstract

In the U.S. and in other OECD countries, government debt levels as compared to GDP have soared since 2007. According to statistics from the Federal Reserve, the U.S. government debt level reached 62.86% of GDP by Q4 2007 and the debt level has increased to 127.52% by Q1 2021.

Q4 2007 was, of course, just before the Great Recession occurred and Q1 2021 was well after the start of the Corona virus crisis.

There are three questions to be answered: the first one is who bears the costs of servicing the U.S. government debt levels; the second one is about the applicable interest rates and the third one is about Quantitative Easing (QE), which did not exist in the U.S. until November 2008.

Whatever politicians of all convictions claim and however they use budgetary smoke screens to make their tax take look acceptable, it is the household sector that are the ultimate pay masters in whatever country. Households pay in two ways; firstly by suffering from unemployment levels over time and secondly by being the direct and indirect payees of all taxes.

A complicating factor is the level of applicable interest rates, which in the EU has gone down to the extreme level of applying negative interest rates over savings.

Simple accounting rules make a distinction between assets –the monetary value of what one owns- and liabilities -the amounts one owes to others-. Each household in the U.S. may have some assets like home equity or pension savings, but may also have debts for car loans or student debts for instance. Furthermore households hand over a substantial amount of their income to companies for their products and services on top of paying taxes directly to the U.S. government.

The concept that a government owns assets is based on a misunderstanding. The assets are based on savings, ultimately provided by individual households, some of who may live overseas.

The aim of this paper is to illustrate that the actions of the U.S. government, including QE, do not only support economic growth levels at times, but can also create barriers to such growth. How these barriers can be turned into opportunities is the main subject of this paper.

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