US Debt & its affect on Global Economy

The United States has the largest economy in the entire world, and if there are problems with the US economy the shock waves are felt all over the world. The global economy is inter-connected on several levels, because of most international trade, specifical oil is carried out in dollars, and if the value of the dollar falls it affects movements, buying and purchasing power and the cost of goods in nearly every country in the world. Since America is the largest market for most countries a reduction in demand for their products would cause massive unemployment because Americans cannot buy the products that they export.

This would result in fewer export orders for these countries causing an economic depression. Countries that import from the US would have to pay much more in their local currencies for the dollar which in essence restricts their buying capacity and US manufacturers and exporters also see a decline in their export orders. If the United States does not manage its debt and defaults on it, it would increase the cost of finance for business because of the increase in interest rates. This would, in turn, contribute to inflation.

The stock market would also suffer badly as investors might feel that investing in the US market was too risky.  This would cause the stock markets to fall as investors would take their money to other countries, or invest in gold. All this would be economically disastrous and probably usher in another bad recession. The US economy is affected by its national debt which is the unresolved balance of government’s internal and external debts, or what the government owes in the in the form of issued Treasury bills, notes, and bonds including debts of foreign banks and governments. When the government has a high amount of debt it reduces government spending and budgeting.

The less the government spends, the more unemployment levels rise. When unemployment levels rise, the government has to spend more on welfare which is money spent with no productive aspects. This is an entire cycle that is oft repeated in many countries of the world because their currencies are linked with the US dollar. Any country’s debt is when a government’s expenditures exceed its income during a financial year. This is known as a deficit and it is assessed according to the country’s Gross Domestic Product (GDP). Countries with bigger GDP’s can easily handle large debts much better than countries with a smaller GDP (Clarida, 2005).