The US needs to pay off it’s debts and it won’t be as fun as acquiring them.

David Edwards, Staff Writer

Ideology: Conservative | Writing from: Yale University

The American employment/population stands currently at 58.8%, having peaked at 63.4% in 2007.  A mere two years have turned the economic picture in this country upside down.  The last time employment dipped so far was in 1983, when household debt per capita was $9,000.  Today, household debt stands at $58,000 (both figures in real terms).

Needless to say, the American consumer has got to de-leverage, and quickly.  Ben Bernanke and Co. recognize this problem and are taking measures to correct it.  In 2005, Ben Bernanke said in a speech: “Over the past decade a combination of diverse forces has created a significant increase in the global supply of saving [notice not the domestic supply]—a global saving glut—which helps to explain both the increase in the U.S. current account deficit [a broad measure of the trade deficit] and the relatively low level of long-term real interest rates in the world today.”

The past several years have witnessed the American population accustomed to consume excessively and accept foreign investment, while at the same time shunning savings and neglecting current account deficits.  One might call the last two decades periods of booming domestic economic growth a debtors paradise, in which the aging generations (namely the baby boomers) borrowed lots of money, led lavish lifestyles, and disregarded the crippling nature of debt.

The Federal Reserve has some very important economic challenges ahead of it, one of which is to curb the American consumer’s appetite for debt.  In my opinion, the Fed is planning a radical economic “facelift” for the US.  At the G-20 Summit in Pittsburgh this September, the US pledged to take steps to reduce government purchases and raise taxes in the long run while China has pledged to increase internal spending on infrastructure and education.  These two measures, if agreed to and carried out properly, have the potential to transform the US from the world’s largest debtor nation to an export-rich manufacturing economy once more.

What these measures are meant to do is reduce the savings “glut” that is China and relieve the indebtedness of the US.  This change in savings distributions will undoubtedly fix the massive trade deficits that the US incurs every year, but it will not come easily.  A reduction of the savings rate in China and an increase of savings rate in the US will lead to higher world interest rates, more expensive goods exported from China, and a weaker dollar.  These negative effects all sound very painful and will certainly bring an end to the American mantra “spend, spend, spend.”  However, on a more positive note, the US will see more competitive export possibilities worldwide, a revival of manufacturing capacity, and possibly trade surpluses.

In my opinion, Ben Bernanke and the Federal Reserve have a plan for reducing the aforementioned world “saving glut,” reducing the American consumer’s debt burden, and bringing manufacturing and exports back to the states.  Over the next several years we will see the Fed engage in activities that will attempt to increase domestic saving and neutralize our trade deficits, but the transformation its dreams of will be long and painful for our current way of life, our economy, and especially our generation (who will bear much of the burden).