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Kimberly Amadeo

There Is No Debt Crisis

By December 5, 2012

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OK, let's see if I've got this straight. Both Republicans and Democrats created a fiscal cliff and budget sequestration to force themselves to reduce the budget deficit and debt. The main disagreement is whether we should cut entitlement spending (i.e., Medicare, Social Security and Medicaid) or raise taxes on those making $250,000 or more. The entire economy is being held hostage while our elected officials duke it out.

Without a resolution, our battle-scarred economy will be thrown right back into recession. The 12.3 million unemployed will have an even worse time trying to find a job, and the weak housing market will be KO'd back onto the canvas. Is this really the right time to be worrying about the debt? No, for two reasons.First, the timing is wrong, wrong, wrong. We are barely in the expansion phase of the business cycle. The economy needs just a little bit of a boost to get it back to the 3-4% growth needed to create enough jobs to reabsorb the unemployed. Business leaders and shoppers need the confidence inspired by strong political leaders, to really get the economic flywheel whirring again.

Second, there is no debt crisis! The U.S. government can easily pay all the owners of Treasury bills, bonds and notes with more credit. Unlike Greece and Spain, we can easily print all the dollars we need to make good on our debt. Yes, $16 trillion is such a large number that it boggles the mind. On the other hand, that's also how large the U.S. economy output is. If growth picks up to 3-4%, then the debt-to-GDP ratio will shrink back below 100%.

Then, and only then, should the government think about cutting back on spending, and/or raising taxes. When the business cycle is in the expansion phase, then it needs to be cooled off by these contractionary fiscal policies to avoid another bubble. That's how it's supposed to be done.

What It Means to You

Don't let all these political scare tactics about the debt "crisis" bother you. The U.S. is not in a debt crisis like Europe. Our economy is perfectly capable of pulling us out of debt. Look at this table I just put together on the National Debt by Year. I keep hearing how the $296 billion debt from World War II has never been paid off. Yes, that's the last time our debt-to-GDP ratio was more than 100%. But we grew out of it. The U.S. GDP was only $223 billion then.

What's going on in Washington right now is a power struggle to determine who has more political clout. The argument over tax increases vs entitlement cuts is a political one, not an economic one. The economic recovery is doing pretty well...despite everything those in Washington are doing to stop it.

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December 11, 2012 at 2:13 pm
(1) Chan says:

Do they (Americans) expect one more debt crisis on top of all possible crisis that the country is facing. Now holiday season is approacing, be truth to yourself and tell the truth “do anybody is having any good time” of course this question refers to general citizens except those called rich Americans only 10% or less.

America was never good in ecnomy at any time except Clinton presidency
time.Because I say like this is that the country is in recession in every eight or ten years, and more than that it requires atleast six years to corrcet the previous recession and next two years there will another recession and this goes in cyclic order and this time they are nailed.

December 11, 2012 at 2:54 pm
(2) Concerned says:

As per your write up if the US Govt does indeed start printing more money to pay for a portion of the 16 T debt then won’t that devalue our dollar even more so that each dollar we have saved is worth that much less? And if so what can we do to offset such losses that can occur rapidly? Thank you.

December 12, 2012 at 12:46 am
(3) The Greatest Depression of All Time says:

Amadeo states there is no debt crisis. What do you call $16 trillion? Oh!We can get out of this current problem by paying debt with credit which is actually debt. Wow! Isn’t that smart. Also, what comes to mind when you read the next statement,”The U.S. government can easily pay all the owners of Treasury bills, bonds and notes with more credit.” Answer: The Federal Reserve Ponzi Scheme. The Greatest Depression of All Time is just around the corner.

December 12, 2012 at 12:50 am
(4) Chan says:

Isn’t that right Kim what I commented above.If so what is the best way to get out of this loop, and if not it is not correct why this kind of situation arised. How suddenly the headache of fiscal cliff came in to play.
Please elaborate your answer either way.Thank you very much.

December 12, 2012 at 3:30 pm
(5) useconomy says:

@ Chan — The fiscal cliff occurred because politicians don’t get reelected by cutting programs and raising taxes. They had to create a crisis to force themselves to balance the budget. This is self-created, since the debt is not really a crisis right now, although it needs to be dealt with over the long run.

@ Concerned — Yes, the more the government prints money to pay for the debt, the lower the value of the dollar. Read some great ideas on how to Hedge Against the Dollar Decline.

@ Greatest Depression of All Time — Too much monetary contraction, not expansion, leads to depression. If the Fed were creating a bubble that it could not control, that would lead to a collapse. However, the Fed can easily and carefully contract the money supply to slow down any bubble or inflation. Without a bubble, there is no collapse to lead to depression. For more, see 1929 Depression.

The economy is driven by confidence, and really nothing else. Everything the Fed and the government does is to buoy confidence and keep the market going. That’s what FDR meant when he said “The only thing we have to fear is fear itself.” The current uncertainty over the fiscal cliff is keeping the brakes on economic growth. Once that’s removed (if it is!) then see how robustly the economy grows!


December 12, 2012 at 2:41 pm
(6) Chan says:

Hi kim,

Eagerly waiting for your answer to the cooments i made at the top of the column. Thank you.

December 16, 2012 at 1:59 pm
(7) Chan says:

there is no credit crisis, but there is a “Living crisis”

Because of this:

The guns and the bombs, the rockets and the warships, are all symbols of human failure.This is the exact way to put it how present day America is.

December 17, 2012 at 1:25 pm
(8) useconomy says:

Well, I don’t think the U.S. is the only one with guns, bombs, rockets and warships. However, I do hope the entire world can find better ways to resolve their differences…one day.

March 12, 2013 at 1:41 pm
(9) david says:

Ok, I am sorry I am late to this party, but this article is about the stupidest thing I have ever read. What people don’t understand is that the economy and debt are two different animals. This fake induced economy only exists, because the federal government is spending money it does not have. It is like losing your job and receiving a 2 million dollar credit card. You can use the card to make payments, buy a house, car, food, etc. Eventually that card gets maxed out and without additional credit you go broke. The fed government is insolvent. It can not pay its debts or its obligations. It has to keep printing money. The mountain of debt is now so high it needs more and more just to keep the illusion of moving forward. As inflation escalates, and more and more people jump in the wagon (THE FED GOV”T) subsidies, jobs, student loans, welfare, foodstampse, etc there are less productive people to pull the wagon. As it gets heavier, the pullers get tired and jump in with the rest.

The government is currently in the process of collapsing. When this hits full steam with the next explosion which is the us treasury bond bubble, the dollar will collapse, and with it the government.

It is unfortunate, but you would be much better preparing for the inevitable, which is getting much closer than you think. 2013-2014sh. Our government will duplicate the former USSR, and we are in for a long period of collapse. It will be very difficult for the majority of the country.

The time to worry about debt was 40 years ago, not now… We have fallen off the cliff, and are in the air, saying “this isnt’ so bad”. The amount of splat is going to be directly proportional to the escalated debt.

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