The total global debt is 250 trillion dollars, but there’s only 50 trillion dollars in coins and currencies. Japan is at 221% debt-to-GDP ratio and they are going to take couple of decades to recover from it but most of Japan’s debt are held by its own citizens, so the risk of defaulting is much lower—their fate is not necessarily tied to other countries. USA, however, also owes to foreign creditors, China owns nearly a trillion dollars in US Treasury Bonds, Japan also owns a trillion dollars in US treasury Bonds.
USA was not a country founded on the ideals of ‘debt equals prosperity’. It was founded on the ideals ‘save, invest, and prosper’. But, since then it has not been part of American culture to save before you spend. There’s always been access to credit, cheap mortgages, credit cards, car loans. This has been encouraged by Federal Reserve policies and by politicians in America for generations. The mortgage bubble in USA took the total debt in America to a whole new level. The ordinary American doesn’t look at whether or not he can afford a car, house, education expenses; he just looks at whether he can make the monthly payment and get through by financing it via debt; and this kind of mind-set has the made the largest economy in the world vulnerable to a global crisis. People are just focussing on getting by with each month’s paycheque and are not saving for any contingencies that may occur.
Placing the blame on anyone for creating such a mind-set is short-sighted because the blame must go around –Not every citizen is financially literate and thus look upon the leaders of the country to understand how one should handle his personal finances– The citizens are being told by leaders and people who are educated that taking on such debt is ‘smart’ so they are following them. When you are sitting at the car dealership and you know you can’t afford that Mercedes, you decide to get a loan to cut it out of your paycheque every month. Even though you know that you can’t afford something but the support in your mind that the government will let you get away it tempted you to open your empty pocket.
Politicians enjoyed saying that owning a home is the ‘American dream’. But, what they were really saying is that mortgaging yourself up to the eyeballs with the assistance of a federal agency is the ‘American dream’. In such a case, you get to ‘feel’ wealthy, you are not actually wealthy, you have become an indentured servant to this great big mortgage market which is the largest mortgage market on planet earth. Fannie Mae, Freddie Mac, and FHA extended & increased eligibility for mortgages to such extents that some American citizens are paying off their mortgages even into their retirement. They are retired and still financially vulnerable- it’s the culture which USA as a country has accepted and has been told by its leaders that it’s the way it should be. Politicians found out that people enjoy ‘feeling’ wealthy even if they weren’t actually wealthy. Hence, Both the government and the citizens are responsible for this situation.
All these events culminated to set the stage for the 2007-2008 subprime mortgage crisis.
Written by: Raghav Agarwal
Citations:
Bohn, H. (2011). The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk. FinanzArchiv / Public Finance Analysis, 67(3), 282-302. Retrieved May 2, 2020, from www.jstor.org/stable/41303592
•Schwarcz, Steven L., Rollover Risk: Ideating a U.S. Debt Default (January 30, 2014). Boston College Law Review, Vol. 55, No. 1, p.1 2014. Available at SSRN: https://ssrn.com/abstract=2307569 or http://dx.doi.org/10.2139/ssrn.2307569
•Vuletic, Dominik, Next Global Crisis: Greatest Recession in the History of Capitalism is at the Doorstep (September 21, 2015). Available at SSRN: https://ssrn.com/abstract=2663630 or http://dx.doi.org/10.2139/ssrn.2663630
•Lo Duca, Marco and Nicoletti, Giulio and Martinez, Ariadna, Global Corporate Bond Issuance: What Role for US Quantitative Easing? (February 18, 2014). ECB Working Paper No. 1649. Available at SSRN: https://ssrn.com/abstract=2397787