America in Debt

September 13, 1985

Report Outline
U.S. a Debtor Nation
Growing Internal Debts
Policy Alternatives

U.S. a Debtor Nation

World Debt Crisis Comes to America

A Scant Two Years have passed since economists warned of an impending world crisis brought on by the inability of several Third World nations to repay their debts. Because much of that outstanding debt was owed to American banks, massive default by Mexico, Brazil and other developing nations would have undermined the banking system of their biggest creditor, the United States. The Third World debt crisis still threatens, despite the recovery of recent years. But many economists believe an even more immediate debt crisis has developed in the United States, which for the first time since 1914 has joined the ranks of debtor nations.

It came as no surprise when the Commerce Department announced earlier this year that the United States had become a net debtor nation sometime in the spring, after having net claims of some $150 billion on the rest of the world as recently as the end of 1982. Economists and politicians alike had predicted that a series of policy decisions taken by the Reagan administration would have that effect. The idea of going into debt to the rest of the world dismays many who equate the national debt with household debt, but many economists view the nation's debtor status as only one consequence of Reagan's economic and monetary policies.

The abrupt rise in the external debt has coincided with increasing internal debt, reinforcing some economists' fears of an impending financial crisis. Just as the nation has gone into the red with the rest of the world, American consumers and businesses have been accumulating debts of their own at a rapid pace. Taken together, the outstanding debt of all types—public, consumer and corporate—grew faster in 1984 than at any time since World War II and now amounts to more than $5 trillion. While that astounding sum is small compared with the country's total assets of $24 trillion, the annual interest on the debt, about $600 billion, amounts to 16 percent of the gross national product (GNP), the country's total output of goods and services.

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