The United States Crosses The Line Of Debt Addressed By Hawks For Decades

 

Deficit hawks and economists have been consistently emphasizing the fact that the United States was borrowing too much money for the past few decades. Due to this, the federal debt was increasing rapidly and the economic ruin was certain – according to them, taxes would rise, interest rates would significantly increase, and inflation would be at its peak.

The recent economic collapse due to the COVID-19 pandemic has unleashed a historic run of the borrowing of the government – trillions of dollars unemployment insurance expansions, stimulus payments, and loans to keep the small businesses afloat.

However, the economy hasn’t drowned yet, and there is a sense that the United States could make both ends meet without any serious consequences.

Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics and a former chief economist for the International Monetary Fund said, ‘At this stage, I think, nobody is very worried about debt. It’s clear that we can probably go where we are going, which is debt ratios above 100% in many countries. And that’s not the end of the world.’

This insignificant attitude showcases an evolution in the thought process of the central bankers, economists, and investors about the government debt.

The debt of rich countries like Japan and the United States has relentlessly increased in the last few decades, and on the other hand, the cost of carrying that debt has tumbled. This indicates that the market is losing trust in the ability of these rich countries to carry their financial debts.

Critics have been repeatedly saying that this circular form of fiscal finance, in which the government and the central bank, on one hand, create the money needed and on other hand, the government taxes and spends the money – this would lead to a spiral of inflation.

Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a proponent of Modern Monetary Theory said, ‘This is a 40-year pattern’. This suggests that the countries that hold their own currencies have more opportunities for running large deficits than though in a traditional manner. She also said, ‘The whole premise that deficits drive up interest rates, it’s just wrong.’

At the end of 2019, the debt of the United States was approximately $17 trillion, which is roughly 80% of the GDP. In January, it was predicted by the government analysts that the debt would reach 100% of the GDP in about 2030. But, the debt increased to $20.53 trillion, which is roughly 106% of the GDP.

Rick Rieder, the global chief investment officer of fixed income at BlackRock said, ‘What’s very clear is that the U.S. economy has some room. I would argue that we still have room now for another fiscal package.’ Daniel Ivascyn, the chief investment officer for PIMCO said, ‘When you have a central bank essentially funding these deficits, you can take debt levels to higher debt levels than people envisioned.’