The mountain of US debt will exceed the size of the entire economy, the largest since 1945

The US government’s war on coronavirus is putting the greatest pressure on the Treasury since the US campaign to defeat Nazi Germany and Imperial Japan three-quarters of a century ago.

The Congressional Budget Office warned that the government this year will run the largest budget deficit, as a percentage of the economy, since 1945, when World War II ended. Next year, federal debt, the sum of annual deficits year after year, is forecast to exceed the size of the entire American economy for the first time since 1946. In a few years, it is on track to set a new high.

It may be surprising to hear that most economists consider money well spent, or at least necessary. Few think it wise to challenge the amount of loans that are deemed necessary to keep American households and businesses through the most serious public health crisis in more than 100 years.

That’s especially true, economists say, when government borrowing costs are very low and investors still seem eager to buy their debt as fast as the Treasury issues it.

Here’s a closer look at federal debt and the government’s use of it to combat the pandemic and the economic pain it has inflicted.

HOW MUCH MONEY ARE WE TALKING ABOUT?

The annual deficit, the gap between what the government spends and what it collects in taxes, will reach $ 3.3 trillion in the budget year ending Sept. 30, the CBO projects. That equates to 16 percent of America’s gross domestic product, which is the broadest measure of economic output. Not in 75 years has a deficit been so great.

Federal debt, which reflects accumulated deficits and the occasional surplus, is expected to reach 100 percent of GDP next year. It is then projected to continue to rise to US $ 24.5 trillion, 107 percent of GDP, in 2023. That would break the record of 106 percent of GDP set in 1946 (the percentage does not include debts that government agencies have each other). , including the Social Security trust fund).

WHY IS THE BUDGET SO WASHED?

The United States government was already deeply in debt even before the virus struck in March. The budget had absorbed spending from the Great Recession of 2007-2009, federal retirement benefits for the great baby boomers, and the cost of President Donald Trump’s tax cut in 2017. Last year, the burden of debt reached 79 percent of GDP, the highest proportion since 1948.

Then came the pandemic. The economy plunged into a sick free fall as businesses closed and millions of Americans took refuge in their homes to avoid infection. GDP collapsed at an annual rate of 31.7 percent from April to June, the worst three months on record dating back to 1947. In March and April combined, employers cut a record 22 million jobs.

To help Americans weather the crisis, Congress passed a $ 2 trillion aid bill in March. Among other things, the package sent Americans one-time checks of up to $ 1,200 and temporarily offered the unemployed $ 600 a week in addition to their state unemployment benefits.

Economists say the bailout likely helped prevent the economy from sinking into a depression, but also that much more help is needed.

CAN THE UNITED STATES PAY ALL THAT MONEY?

After World War II, the United States paid off the federal debt with surprising speed. By 1961, the debt had been reduced to 44% of GDP, the same level as in the pre-war year of 1940.

Behind that success was a rapidly growing economy that generated increasing revenues for the government and eliminated debt. From 1947 to 1961, the economy grew at an annual rate of 3.3 percent. The financial system was strictly regulated by the government. This allowed economic authorities to keep interest rates artificially low and minimize the cost of debt repayment.

The circumstances are somewhat different now. The economy is not growing as fast as it did in the postwar boom years. Since 2010, GDP growth has averaged just 2.3%, even excluding this year’s economic implosion. And the government doesn’t control interest rates like it used to, not after the financial deregulation of the 1980s.

Still, the Federal Reserve is helping to keep government borrowing rates very low by buying huge volumes of Treasury debt.

DOES THE DEBT HAVE ECONOMIC CONSEQUENCES?

Economists have long warned that too many government loans can hurt the economy. When the government takes on excessive debt, the argument continues, it competes with businesses and consumers for loans, forcing prohibitively high borrowing rates and jeopardizing growth.

Another concern is that investors will demand increasingly higher interest rates to accept the risk that governments will default on their debts.

Some economists and budget watchers still warn that reckoning day will come, and the United States will have to curb spending, raise taxes, or both.

But after the Great Recession, many economists began to reconsider their view of debt. The recovery in the United States and especially in Europe was slow, in part because policy makers were too reluctant to stimulate growth with debt.

In the United States, rates did not increase even though government debts were high. Investors, it turned out, had an almost insatiable appetite for US Treasuries, which are still considered the safest investment in the world. His rush to buy federal debt helped keep rates low and limited the government’s borrowing costs. So did persistently low inflation.

In an environment of such low rates and low inflation, the risk of accumulating more debt seems more manageable, at least for countries like the United States and Japan that borrow in their own currencies.

In a speech last year, Olivier Blanchard, former chief economist at the International Monetary Fund, stated:

“Put bluntly, public debt may not have a fiscal cost … The likelihood that the US government will be able to roll over debt, that it can issue debt and achieve a declining debt-to-GDP ratio without having to increase taxes later, is high. “

– AP