When Donald Trump is inaugurated as President on January 20th, 2017, he faces a myriad of problems. Among the financial and economic dilemmas is the national debt.
The nation’s debt has grown at a pace that economists and policymakers feel are a disaster waiting to happen. However, Trump stated during the presidential campaign that he will improve the nation’s infrastructure, increase military spending, and upgrade veteran’s benefits, all while cutting taxes. How can this all be done while dealing with a burgeoning national debt?
How Did We Get Here?
The National Debt is money the federal government owes consisting of the Treasury Department and other federal agencies debt instruments. These financial instruments were issued to pay for the federal government’s operation and deficits. When government spending exceeds tax revenues and other financial receipts, the federal government borrows using these instruments. However, the total gross amount the Treasury Department ultimately borrows is limited by the debt ceiling and only Congress may increase it.
In theory, this method can work. The premise is to pay back the borrowed money with interest, over time. The problem is that when the federal government borrows it is usually to cover deficits adding up to trillions of dollars. These debt instruments are purchased by commercial banks, mutual funds, pensions, and the Federal Reserve. Global investors believe in Treasury instruments’ safety and purchased trillions of dollars of US debt. These instruments are considered conservative investments backed by the ‘full faith and credit’ of the United States who will pay them back no matter what.
This post was published at FinancialSense on 01/04/2017.
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