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Understanding the Causes of a Debt Crisis

By Edited Nov 13, 2013 0 0

3d Person And Debt
Credit: Image: renjith krishnan / FreeDigitalPhotos.net

The causes of the debt crisis which devastates the American economy can be attributed to three components: the government, foreign factors, and the local banking system.

Causes of the Debt Crisis - The Government

The United States government spending is recorded to be over what it is able to earn. Daily expenditures as of recent statistics are at $5 billion dollars on a daily basis. A greater sum of this is applied to military expenses and to projects which are aimed to resolve the debt crisis.


In a recent development on the U.S.’s war against terrorism, Osama Bin Laden was killed on May 6, 2011. This does not guarantee though that terror threats are completely obliterated. The government’s expenses on this sector may continue against those who may plan to attack democracy in the same manner as Al Qaeda did.

Aside from military funding, the U.S. spends millions for businesses and individuals that are affected by the debt crisis. Small business loans are funded to help business establishments which are struggling to rebuild their companies. Unemployed individuals also receive monthly checks for assistance.


On a side note, unemployment rates are still beyond the 8% margin. It is currently at 8.9% with about 14 million Americans out of work. With the rate of daily expenses at $5 billion each day, budget deficit is measured to be at least 40 cents per one dollar. This economic issue forces the government to get funding from borrowed funds just to sustain a day’s needs.

National Debt

As of March 2011, national debt is at $14.3 million dollars. Budget deficit on the other hand is at $1.65 trillion. This means that every American in a sense owes around $46,000 due to the national debt. In terms of deficit, last February 2011’s record of $223 billion was the highest ever. This marks a 14% increase in just a few months.

Causes of the Debt Crisis - Foreign Factors

The second most prominent cause of the debt crisis involves foreign factors. The dollar is pulled away from itself due to reserves owned by other countries. Asian countries China and Japan hold the highest in dollar reserves at $2 trillion and $800 billion respectively.These nations are not expected to make any type of movement though which will compromise business relations with the U.S. anytime soon. They rely heavily on produced goods which are exported for American consumers. Disrupting this type of business relationship will also hamper their local economy.

Causes of the Debt Crisis - Banking System

The third contributory factor, the banking system is not as impacting as the first two. Nonetheless, it also contributes to the United States debt crisis. The rules applicable to financing, credits, and lending contributes to individual American debt. Although lower interest rates due to implemented federal laws allowed borrowing money to become easy, there is no guarantee though that every creditor is paid and debtors paying.

Aside from the capacity of a borrower, other reasons such as the lending institutions own imposed rates and fees may also cause payment scheme problems. This causes the rise in individual debts which contribute to the debt crisis being faced by the American nation today.

Understanding how each factor contributes to the overall national debt will make it easier to find ways to battle debt. Even personal solutions can help resolve a major national problem little by little.

Related Article:

Debt Crisis Strikes an All Time World Record



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