The US economy is affected by its national debt which is the unresolved balance of the government’s internal and external debts, or what the government owes in the form of issued Treasury bills, notes, and bonds including debts of foreign banks and governments. When the government has a high amount of debt it reduces government spending and budgeting. The less the government spends, the more unemployment levels rise.
When unemployment levels rise, the government has to spend more on welfare which is money spent with no productive aspects. This is an entire cycle that is oft repeated in many countries of the world because their currencies are linked to the US dollar.
Effect of National Debt on the US Economy
Any country’s debt is when a government’s expenditures exceed its income during a financial year. This is known as a deficit and it is assessed according to the country’s Gross Domestic Product (GDP). Countries with bigger GDPs can easily handle large debts much better than countries with smaller GDPs.
Countries that import from the US would have to pay much more in their local currencies for the dollar which in essence restricts their buying capacity and US manufacturers and exporters also see a decline in their export orders. If the United States does not manage its debt and defaults on it, it would increase the cost of finance for business because of the increase in interest rates.
This would, in turn, contribute to inflation. The stock market would also suffer badly as investors might feel that investing in the US market was too risky. This would cause the stock markets to fall as investors would take their money to other countries, or invest in gold.
All this would be economically disastrous and probably usher in another bad recession. The major reason that the national debt has spiraled out of control is declining revenues and government welfare and subsidy payments. However, the austerity measure would only increase welfare payments, and increase unemployment and poverty.
If this delays the economic recovery of America, it will delay the economic recovery of all the economies that are linked in any way to the US economy and the dollar. Although global markets have been sluggish, they have not dropped drastically. Global markets have been drifting lower, but have not fallen dramatically.
Still, economists warned that the enthusiasm for investing will change dramatically if the shutdown continues, and especially if the U.S. government defaults on its debt. European markets are currently the most susceptible, and any delay in stabilizing the US market will delay economic recovery there as well.