Monday, November 23, 2009

America and the exploding Debt.

I read an interesting article in NYT regarding how America is being burdened with a huge debt load. The article says that by the year 2019 America would alone be paying nearly USD 700.00 Billion dollars in interest. This is really outrageous and worrisome picture. As we have seen before if you keep on borrowing money and spending it without having the means to pay for it can lead to disaster.

Household budget can be taken as an example. What do you believe that if you keep on borrowing money and paying interest on it, will it not become unmanageable? The creditors can stop lending to you, your credit can suffer and the creditors can demand either very high interest rate to keep on lending to you or just stop lending you altogether.

The same can happen to a country’s debt. America is lucky enough that it finances its debt by its own currency and people have faith in its ability to pay back what they are owned. But there will just come a point that the debt will be deemed to be too big for the investors to keep on lending (or buying) treasury securities. And that is when the rates will keep on going up so that America can finance its Budget.

Although others countries like Italy, Germany, Japan, the U.K.also have high debt as compared to their GDP but we should be worrying on our side. Because if America is unable to pay its debt obligations (highly unlikely right now) it will have disastrous consequences the likes of which the world would not have seen before.

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