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From being the world's largest creditor to the world's largest debtor: What happened to America?

Prior to 1985, the United States was the world’s creditor. It means that the United States was the country that loaned money to other countries and generated national income through interest payments. This gave the United States a lot of power and influence across the world.

The United States was the largest creditor in the world for much of the 20th century. As a matter of fact, The United States emerged from World War II as the world's leading economic power. This led to a large influx of foreign investment in the United States, as foreign investors sought to take advantage of the country's strong economy.

The Marshall Plan was perhaps the most impact economic phenomenon that secured the U.S.’s position as the world’s creditor. Indeed, following World War II, the United States enacted the Marshall Plan in 1948 to provide foreign aid to Western Europe. The United States transferred $13.3 billion (equivalent of $173 billion in 2023) in economic recovery programs to Western European economies after the end of World War II.

Besides the Marshall Plan, the Bretton Woods system also cemented the United States’ status as the largest creditor. The Bretton Woods system, which was established in 1944, pegged the value of the U.S. dollar to gold. This made the U.S. dollar the world's reserve currency, and it gave the United States a unique advantage in attracting foreign investment.

U.S. Government Spending

Source: Statista

So what happened? Why and how did the United States suddenly become the world’s largest debtor? The United States became the world's largest debtor in 1985. But the path to becoming the world’s largest debtor was paved when the United States abandoned the gold standard in 1971. Indeed, President Nixon gave the coup de grace to the commodity-backed system when he took the United States off the gold standard. Under the gold standard, the government was limited in its ability to use monetary policy to manage the economy. Taking the United States off the gold standard empowered the U.S. government to have absolute and unlimited power over the economy.

No longer having the dollar pegged to the gold standard allowed the U.S. government to control and manipulate the national economy at will via the U.S. Federal Reserve. As a result, the U.S. government started to dramatically increase its spending and started running deficits since gold could no longer prevent the federal government to spend at will.

In 1985, the United States officially became the world’s largest debtor. Indeed, the United States has been running a trade deficit for most of the past 40 years, meaning that it imports more goods and services than it exports. This means that the country is spending more money on foreign goods and services than it is earning from selling its own goods and services to foreigners.

U.S. National Debt, 1990-2022

Source: Statista

Furthermore, foreign investors have been buying more and more U.S. assets in recent decades, including stocks, bonds, and real estate. This investment may have helped to finance the U.S. government's budget deficits, but it has also contributed to the country's net debt. Thus, the national debt skyrocketed between 1990 and 2022 from $3.2 trillion in 1990 to $32 trillion in 2022.

The national debt is the financial tool that the U.S. government uses to enforce its political will on the national economy. Many economists do not see the national debt as a serious problem but it is. It is a problem because it depreciates the value of the dollar and depreciates the real value of the national economy as well. The more loans a government takes, the more obligations it will have to pay back.

The depreciation of the dollar affects the taxpayer/consumer because it makes life more expensive than it should be. For example, back in the 1970s, with $100,000, one could purchase a house for $40,000 or $50,000 and buy a car and other assets. Today, $100,000 can no longer afford a house, and can barely afford a car. This is the doing of the U.S. government that increased government spending, which in turn created inflation over the years. And inflation reduced the value of the goods and services produced.

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