U.S. debt won’t stop climbing — Here’s why

With an unfettered trajectory, the U.S. national debt continues to scale unprecedented heights. But is this uncontrolled escalation simply a manifestation of careless policymaking in the corridors of Washington?

While this narrative may fit the popular discourse, the undercurrents shaping America’s burgeoning debt are far more structural and complicated. Let’s take a deep dive into this knotty issue.

The sinister case of income inequality

The invisible hands pushing the U.S. into deeper debt are tightly linked to the nation’s climbing income inequality. The American Dream, historically shared across social strata, is now seemingly confined to the higher echelons of wealth.

The rich are getting richer, and with a propensity to save much more of their income than the average worker or middle-class citizen, the dynamic of consumption in the economy is shifting. This shift ultimately results in a spike in savings at the cost of reduced consumption.

In an ideal world, these extra savings would serve as fuel for investment, balancing out the drop in consumption and maintaining total demand.

More importantly, in the long run, this should cause growth to accelerate due to a surge in investment. However, the world we live in is far from this idealistic scenario.

When saving doesn’t mean investing

A cornerstone of supply-side economics, the presumption that increased savings stimulate higher investment held true in an era where scarcity of savings and exorbitant capital costs inhibited business investments.

Today, weak demand, not capital cost, is the real bottleneck for business investment. Consequently, the augmented savings accrued by the wealthy haven’t been matched by an uptick in business investment.

When reduced consumption doesn’t translate into increased investment, total demand shrinks, and the economy faces dire consequences. In response, businesses curtail production and workforce. To circumvent this, Washington typically resorts to two measures.

One, the Federal Reserve steps in, initiating policies to spur household borrowing, maintaining the consumption level despite reduced income. Two, the government itself borrows, substituting the dwindling demand from reduced household consumption.

By expanding the fiscal deficit, the U.S. manages to counterbalance the adverse effects of rising savings.

Yet another tactic, albeit infeasible for the U.S., would be exporting excess production as a trade surplus. However, the allure of America’s open, well-regulated financial markets attracts foreign surplus, making the U.S. a net savings importer rather than exporter.

The resultant influx enhances the dollar’s value, dampening U.S. manufacturing competitiveness. Thus, income inequality-induced weak demand is worsened by trade deficits needed to assimilate excess foreign production.

To forestall escalating unemployment, the Federal Reserve must stimulate further household debt, or Washington must sustain even greater fiscal deficits.

The debt and unemployment trade-off

The common misconception among policymakers is that the ballooning U.S. debt is a byproduct of reckless financial behavior by households and the government.

In reality, it’s a deeply rooted structural problem, with the nation confronted by a dilemma—not between more and less debt, but between more debt and more unemployment.

Unless Americans tackle the intertwined issues of income inequality and substantial trade deficits, this precarious trade-off is bound to persist.

To rein in the escalating debt without exacerbating unemployment, America must alleviate demand pressure by reversing decades-long policies that cultivate income inequality or enable foreign dumping of surplus savings and production.

In this context, the hullabaloo surrounding debt ceilings is more rhetoric than action, offering Congress a pretense of tackling America’s surging debt.

Despite fervent debates and artificial ceilings, U.S. debt shows no signs of relenting—it’s a structural problem, and structural problems need structural solutions.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Jai Hamid

Jai Hamid is a passionate writer with a keen interest in blockchain technology, the global economy, and literature. She dedicates most of her time to exploring the transformative potential of crypto and the dynamics of worldwide economic trends.

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