Friday, August 22, 2014

The Consequences of Debt

The U.S. is moving deeper and deeper into debt and there is little sign that it is getting out of this problem. According to Hyman (2011, debt can have impact on future generations who have to shoulder the responsibility of repaying that debt. The burden of debt causes reduction of income on future generations because they will have to live with compulsory tax for a long time to come. While foreign borrowing can stimulate the economy for a certain period of time, what is hard to tackle or avoid are the long term implications debt may have on the economy and on society as a whole. A case in point is when, in 1982, the nation of Mexico declared that it was no longer in a position to service its foreign debts (Were, 2001). Despite being an oil producer, Mexico was left to live with the long term implications of foreign debt.

Debt inundates the market with surplus goods and services, competition becomes cutthroat, and consumers will have less to spend. Environmental protection becomes less of a priority with explosive debt, jobs diminish, and there will be an increased movement of corporations to poor overseas countries. Debt forces producers to borrow more money consequently accelerating price hikes and interest rates. Debt held by foreign interests can have long term implications for the U.S. Because Americans don’t save much, the government will be compelled to keep on borrowing from foreign entities such as China. Americans have more concern for U.S. borrowing from China than the political situation and confrontation with Iran (Zhang, 2012).

With increase of debt we will see flooding of cheaper goods lacking value, merger of corporations leading to bigger and bigger conglomerations, and retailers embarking on the importation of goods produced in countries where wages are extremely low. Foreign debt leads to furious competition in international trade. Instead of exporting goods and services, debt forces nations to import which is a sign of weakening economy. Consequently, nations with bigger deficits run to the International Monetary Fund (IMF) for bail out an example being Third World countries notably in Africa Asia who are dependent on the IMF when there economies get worse.

References

Hyman, D.N. (2011). Public finance: A contemporary application of theory to policy (10th). South-Western, Cengage Learning.
Were, M. (2001). Kenya Institute for Public Policy Research and Analysis. Retrieved from http://www.debtweek.org/content/the-impact-of-external-debt-on-economic-growth-and-private-investment-in-kenya/index.html

Zhang, M. (2012). Are foreign holdings of U.S. national debt a threat to our economy? Retrieved from http://www.ibtimes.com/are-foreign-holdings-us-national-debt-threat-our-economy-721691

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