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Kimberly Amadeo

Will the U.S. Go Bankrupt?

By April 13, 2009

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A reader asks:

Will the budget deficit cause the U.S. to go bankrupt in the next 10 years? If so, what would happen?

The Federal Government was already more than $10 trillion in debt in September 2008, and is currently at $11.2 trillion. President Obama's FY 2009 budget deficit will add $1.7 trillion, and another $1.17 trillion in FY 2010. That means the debt could be as high as $14 trillion by 2010. However, the U.S. has many options to prevent bankruptcy.

The U.S. government is increasing the debt levels to spur the economy out of the worst recession since 1982. It is financed by sale of U.S. Treasury bonds, which are still relatively safe investments for foreign buyers such as China and the Japan.

The U.S. debt level is currently at 70% of GDP, and 90% of GDP by 2010. This is high for an industrialized country, although lower than Japan's debt to GDP ratio of 170%. Although this is not a healthy situation for the U.S. economy, deficit spending is needed to stimulate the economy out of recession. By 2010, the economy is expected to return to normal growth rates.

However, budget deficits are still projected at $500 billion per year. This is to pay for mandatory programs such as Social Security and Medicare.

The non-partisan Government Accountability Office recently reported the government needs an additional $53 trillion to pay for all promised benefits in these programs. Obviously, this isn't possible. Instead, the Government will probably cut back on benefits rather than go bankrupt.

What It Means to You

High debt levels will ultimately lead to slower economic growth. The Treasury may need to raise yields to encourage continued purchasing of Treasury bonds. This means higher interest rates on down the road.

Reduced Social Security benefits translates to less government support for your retirement. It's best to plan now for part-time work after you turn 65. Focus on living healthily to make sure you can still work in your older years, as Medicare benefits will probably also be reduced.

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Comments

April 15, 2009 at 9:55 am
(1) mxolisi ndlovu says:

i think America has to be careful in the way it is dishing up its debt. how can Congress let the Fed create money out of thin air? mind, it means the gorvenment has to mortagge social security of future generations away or sell off its massive infrastructure. furthermore who really is the Fed and why did Thomas Jefferson oppose it in the first place? America needs to curtail debt & imports and start saving more to finance bigger exports. America needs to cut down on consumerism and increase on cash expenditures(from saved funds). Also Congress needs to make sure that the nation slows down on selling its bonds to hostile foreigners through their Sovreign Wealth Funds.
Henceforth relook at what the likes of Andrew Jackson,Buchanan,Taylor and Astor lived for, an America strong and free from debt!!!
find out how the forementioned can be achieved at mxolisi@tetrad.co.zw

July 28, 2009 at 12:11 am
(2) Alan says:

Kimberly writes “Although this is not a healthy situation for the U.S. economy, deficit spending is needed to stimulate the economy out of recession.”
This is incorrect. Deficit spending is a political maneuver designed to show the country that politicians are “working on the problem” and/or spend on pet projects benefitting constituents. At best, it postpones the economic problem. At worst, it can collapse a currency, a danger some argue the US faces in the next decade. The politically unwise, but economically sound thing to do, is to reduce government spending, lower taxes, and let entrepreneurs and other forces of the free market maneuver the country out of recession. Or second best, the government should simply sit back and do nothing. This can only happen if people are educated enough to understand why “doing nothing” is the actually the best course of action.

July 28, 2009 at 1:00 am
(3) useconomy says:

If the government had done nothing last September, the banks would have continued to panic. Without overnight lending, businesses would have shut down. Quick response by Paulson and Bernanke restored enough confidence to prevent a collapse.

See Money Market Run.

Kimberly

October 29, 2009 at 10:30 am
(4) John Hancock says:

Look, the US government bailed out it’s constituency with our tax dollars – they won’t do that for an individual investor who makes poor investment decisions out of greed. The US government (I believe) stole our tax dollars and tried to convince us it would create more jobs and stimulate the economy – didn’t get much bang for our tax dollar there did we? The government doesn’t know what it’s doing… it’s flying by the seat of it’s pants trying to buy their way out of this by spending record amounts of tax dollars. I assert the government policy makers who are doing this aren’t any smarter than most of you out there… they just pretend to be. They did it for our own good eh? Whatever. The deficit is high and getting higher… one day it will be time to pay off the US deficit credit card with real money – lookout when that day comes.

October 29, 2009 at 2:08 pm
(5) useconomy says:

You are correct. However, let’s keep in mind that the debt was over $10 trillion before the Stimulus Package was even introduced, much less spent. The government spent over $600 billion a year on war-related activities every year since 2006. This was a huge contributor to the deficit, and the debt. So we can’t put it all on the bailout spending.

Kimberly

November 6, 2009 at 1:51 pm
(6) Alamaric says:

“If the government had done nothing last September, the banks would have continued to panic. Without overnight lending, businesses would have shut down. Quick response by Paulson and Bernanke restored enough confidence to prevent a collapse. ”

This statement is so wrong on many dfferent levels I do not know where to begin. Lets look at this from a completely different point of view first so you can understand how wrong you are.

Lets say you buy a brand new car with credit and never fully pay off that car. You make small min payments like a crdit card. Now the car itself works great at fist but then looses its value over time. Eventually after say 15-20 years the car’s transmission goes. Now it will cost you say 2K to fix the tranmission but the car itself is only worth 1K. Now, do you spend the money to fix the car, or do you go out and buy a new one knowing that you have not fully paid it off.
The answer. Nieth, you learn to live without a car and eventually you will discover that you are better off without it and eventually you will be able to find a better replacement.
By bailing out the banks you are just placing a baindaide over the existing problem. As time goes on these reccessions will get longer and worse until they can no longer be recovered. It would have been real tough, but the banks needed to fail. They have gotton too big and worse they have gotton too irresponsible and concentrate too much entirely on greed. By letting them fail, new banks and things would take thier place. These banks would emerge stronger and theywould not make the same mistakes thier counterparts did. Busines would also collapse and although it would be tough, no lies there, new usiness and manufacturing would begin to take shape. Eventually this country woould emerge stronger than what it did.

By buying out the banks what happens next time when they need trillions instead of billions? What happens next time when the government can not provide those trillions? A worse collapse will occur. Today business and banks lost sight of very fundamental principle. It used to be if a company made a dollar in profit, that was good enough not to panic. Today if a company does not do better than last quater, layoff will occur even though they made a profit. Business are riding thier old technologies instead of creating new ones. Take comcast for instance. They got government grants to lay fiber optic so you could have high speed internet in house. Great right? Wrong, why does tax dollars have to suffer so a big company can compete in the world? In short your tax dollars pay for the new fiber, and then you pay for the new service, meanwhle the corporate execs are raking in profit on top of profit. They should invest in thier profit and paid for those lines themselves. think I am crazy? Well in Asia right now the average highspeed internet is 30megibits. the average from comcast 6 megabits, although they advertise more you do not get it. The give you “burst speeds” whatever that means, but not the real thing. Right now the demand has gone up to the point where they can not keep up with the load. so instead of installing new equipment, what is thier solution? They cut your sevice but still charge you the same by capping it. Although they stopped doing this, many companies do do this. They are waiting for your tax dollars to be given a grant so they can add more equipment. Why? On the account of nothing more than greed.

My whole point to this is that these business practices will only get worse and after time there will be a point where the government can not “bail” anyone out. Then things will get even worse. One of the reaons for so many social programs is because if you keep the poor happy, you can control them and the rich can keep getting richer at the expense of the middle class who will eventually not be able to pay for anything.

The ultimate solution is let business fail and have the new ones take over with new business practices. ring back amnufacturing by offering incentives instead of “free money.” I mean these banks what ar ethey doing right now, borrowing money from you at 0-.25% and then charging you to borrow your OWN money at 5-8%. Why can we not just borrow from the fed ourselves. Like the prevous poster the Fed was the biggest mistake this country ever made and I do not want to get in to it right now. There is a video called “Money as Debt” google it and it explains how our system works.

One last point also, we need to fire everyone in Washington, then take every single law we have and hae a big Law Book Buring Party leaving the constitution in place. Then we have to have to elect new people with new laws only allowing people to use thier own money to get elected and start writing new clean laws. Then we have to have a budget based on the previous years numbers. Burn the Fed and go to an non-fiat currency system. Basicaly start using the gold in fort knox again to back up the dollar.

May 28, 2010 at 6:01 am
(7) Write Off Debt says:

At best, it postpones the economic problem. At worst, it can collapse a currency, a danger some argue the US faces in the next decade. The politically unwise, but economically sound thing to do, is to reduce government spending, lower taxes, and let entrepreneurs and other forces of the free market maneuver the country out of recession.Write Off Debt

September 1, 2010 at 6:21 am
(8) Hopelessness says:

Based on the current trend, US will almost certain to go bankrupt when the interest cost of government debts becomes greater than the taxes collected. Politicians in this country don’t seem to concern about our country’s fiscal responsibility and instead only focusing on winning the next election. Dollar would become worthless if US goes bankrupt. Inflation would go through the roof. The scenario like Germany in 1930′s is a good historical lesson for all of us… Also, just to clarify that there is a difference between Japan’s debts and US debts. More than 80% of Japan’s debts are held by Japanese citizens. Our debts are held mostly by foreigners. This is a very dangerous and alarming trend…

November 6, 2010 at 8:01 am
(9) David Lewenz says:

Since this article was written, we now face a 14 trillion dollar deficit. 40% additional debt in less than 12 months! We have a government with no approved budget, and a projected 2011 budget of 3.8 trillion, and according to the IRS, the most tax to be collected in the 2011 year will be 1.8-2.0 trillion. Resulting in long term debt of 16 trillion in less than 12 months.

The Federal reserve has just implemented QE-2 or in layman terms, plan on printing 1 trillion dollars to purchase USA debt, just by printing money with no assets to back it up. This goal is to reduce interest rates allowing for banks to loan money at very low rates. The problem with this objective is the fact that businesses that need to borrow and are qualified to borrow do not need lower interest rates.

We have a federal government that is out of control, and even with the recent take back of the congress to Red, the new house leader pledged to reduce the 2011 budget to 2008 levels!! Or a reduction of 100 billion! This is far from what is needed. If we do not reduce the size of the federal government to match revenue, we face a dangerous situation that will have long lasting implementations for this country to grow and prosper.

What we need to do, is reduce the Federal budget in 2011 to 2.9 trillion, and in 2012 to 2.4 trillion, anything short of this objective will cause money supply to freeze up since the government will need most free cash to keep the bloated system afloat.

December 13, 2010 at 10:34 am
(10) Claudio PUlla says:

I think the government should stop spending and printing money. Also, they should cut taxes so people spend and craete more jobs to stop this reccession or soo we are going to have a Japaniflation. American is a great country, but if we dont work together we won’t be a great coutry and the government should leave the economy along no gov’t Interference. The best thing is no “taxes” so we people can spend more and get out of this reccession.

January 3, 2011 at 10:16 am
(11) Ormazd says:

Historically speaking, nations that undergo financial bankruptcy tend to break up into smaller units

Bankruptcy has ruined every fantastic power.
Wages can no longer be paid or food bought.

January 25, 2011 at 4:06 pm
(12) hmm says:

Hmm I guess with all this let the banks fail and stuff guess people forgot about the great depression in the early 1900( which was saved by war
).

hmm….

*flame on*

January 31, 2011 at 8:21 pm
(13) Troy says:

The US is doomed to fail. That is a good thing for the world

March 13, 2011 at 7:17 pm
(14) Doug says:

Lets all pray to our ”God” our only God, ”Jesus Christ” for Love,Peace,Joy!!!!

March 23, 2011 at 6:42 pm
(15) topherX says:

your assertion that the debt is the result of “mandatory programs such as Social Security and Medicare” is both false and irresponsible. Irresponsible because you failed to mention military spending which dwarfs all other areas of government expenditures. You have, in the way you framed your argument, chosen murder over medicine, death over life and barbarism over peace.

Please take a moment in the near future and look into the eyes of a child, or someone else you love and ask yourself if a world in which the capitalist classes use propaganda to bleed the general western population of wealth while destroying and pillaging other parts of the world, is really one you want to support with the power of your words.

May 23, 2011 at 2:22 pm
(16) y765 says:

It tis very bad we are now in a lot of debt.

September 2, 2011 at 11:05 am
(17) Sureshruparel says:

How true is picture that goverment shows to people about economic scenario.well all lies all manuplation and all bid image booster presentation but nothing solid truth in what they showing.how can economy not fall if it is been run in total deficency accounts.your economy is in tailspin will collapse if goverment does not stop waste total waste by supporting banks who doing wrong or other business organization involved in making big profits at cost of goverment funds.then ask for bailout. So who is bleeding country??????

January 24, 2012 at 11:23 pm
(18) Theommoma says:

Hi, it is understandable article along with this YouTube video; I canít imagine that one can not understand this simple article having with video demonstration.

May 25, 2013 at 6:49 pm
(19) Mike D. says:

“By 2010, the economy is expected to return to normal growth rates.”

So now that we are in late May 2013, still with high unemployment and the debt is now almost $17 trillion ($16,985,291,908,000) and at the end of FY 2013 the total government debt in the United States, including federal, state, and local, is expected to be $20.541 trillion dollars!

Check it out!
http://www.usgovernmentdebt.us/

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