2019 Student Loan Tax TipsJanuary 20, 2019
The American economy is fine. Nevertheless, the interest of European investors in buying American debt is declining. Should the US be worried about a potential financial crisis?
21 trillion dollars, that’s 21,000 billion. That’s how much debt the USA has. It is a little more than the annual economic output. And the mountain of debt is growing by another 25,000 dollars every second. Projections assume that in two years a trillion dollars of new debt will be added every year. Even if all the billionaires in the world were to pool their money, they would not be able to pay half of the US debt. In order to make the USA debt-free, everyone in the world would have to give the American state almost 3000 dollars.
“The US simply spends more permanently than it earns with taxpayers’ money,” says Marc Goldwein. He is vice president of the Committee for a Responsible Federal Budget, an organization that advocates responsible use of the state budget.
“The politicians are making it even worse,” says Goldwein with a view to the Trump government, which is backing tax cuts and approving new spending at the same time. “They think more about the next elections than about the next generation.
The US government argues that tax cuts could boost the economy – and thus raise more taxes. “This has never worked, not even in the US. And it won’t work with Trump,” says Friedrich Heinemann, head of the Public Finance Research Unit at the Centre for European Economic Research in Mannheim.
Foreign investors lose interest amid potential Economic Crisis
In order to raise money in addition to taxes, the USA – like other countries – sells interest-bearing government bonds to investors, including abroad. The USA’s largest foreign creditor is China. The country holds US debt worth around 1.2 trillion dollars – a sum that also serves as a potential threat in the trade dispute with the USA. Investors from Germany hold around 90 billion dollars in US debt.
What worked well in the past does not seem to work now. Many foreign investors are losing interest in putting their money into US debt. Long-dated government bonds in particular are being bought less and less.
According to figures from the European Central Bank, after 2015 more than half of the newly issued US government bonds were bought by investors from the euro zone. After 2017, however, European investors increasingly sold old US bonds – sales exceeded purchases. “Investors bear a greater risk,” Goldwein explains. “They see that the mountain of debt is growing and there is no way out.”
Student loans are another major indicator of a potential financial crisis, as the amount of student debt keeps skyrocketing while many borrowers who qualify for student loan forgiveness have failed to apply.
Safe haven or the next financial crisis?
Although the high mountain of debt will probably never get smaller again and investors feel deterred by the Trump government’s financial policy, economist Heinemann still regards US government bonds as a safe investment. “Behind this sovereign debt is, of course, an enormous credit rating,” he says. The USA would always be in a position to service its debts.
Debt expert Goldwein does not expect the USA to default either. Nevertheless, he advises caution. “We could trigger a global financial crisis,” says the American. That would be possible if investors continued to lose interest in buying American debt. More Americans are looking into Gold backed IRA and other retirement accounts. Then the government would have to offer higher interest rates on its debt in order to find buyers.
Government bonds with higher interest rates may be attractive to investors, but they can become a problem for the economy as a whole, says Goldwein. Because then there would be less money available for investments that will drive the economy forward. The economy will grow more slowly, and the US will have to raise more money to service its debt. In a few years’ time, interest costs could be higher than government spending on the military, Goldwein says.
It remains to be hoped that foreign investors will not lose their confidence in the USA. After all, US government bonds remain a safe haven. But still: the US debt mountain continues to grow. In the past three minutes by almost 4.5 million dollars.