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Essay on Macroeconomics
National Debt: An Introduction
According to the CIA World Fact book, the United States has $ 1,400,000,000,000 in "external debt," which is defined as the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services. With a total debt of $7,535,629,022,968.30 (as of December 8, 2004), the external debt is 18.578% of the total debt, and 13.486% of the GDP. The vast majority i.e. more than 80% of the government's debt is to it's own residents. On the other hand, nearly 20% of the debt is repayable in foreign currency, so a declining dollar could successfully raise interest rates for this debt.
Nevertheless, one can see globally the poor investment and growth performance of the greatly indebted countries in the past few years is normally attributed, at least somewhat, to the debt burden of their foreign debt, a fact which has been defined by the debt overhang. The economic literature has pointed out several direct and indirect means through which a large foreign debt affects investment and decisively negatively output:
- The debt overhang effect, which refers to the reduced incentives to invest;
- The high domestic real interest rates as a result of the harmful access to international credit;
- The low profitability due to the decline in economic activity and the decrease in public investment that is complementary to private investment.
In essence, the debt overhang hypothesis points out that the accumulated debt act as a tax on future output, gloomy productive investment plans of the private sector and adjustment efforts on the part of governments. In a sense, foreign debt acts like a tax when the debt situation is such that a progress in the economic performance of the indebted country has the side product of higher debt repayments; i.e. creditors receive part of the fruits of increased production or exports by the debtor country........
