Posted on 05/11/2020 6:52:05 AM PDT by Kaslin
Because of the coronavirus bailouts, the federal deficit is now expected to be $3.7 trillion for fiscal year 2020. This is a huge drag on Americans' earnings and retirement security.
Coronavirus panic is hitting the global economy, and America is no exception. To patch over the shelter-in-place orders and compensate closed businesses, Congress has passed well more than $2.7 trillion in so-called stimulus, including subsidized loans to businesses, increased unemployment insurance, direct payments to Americans, and funding for hospitals and state and local governments.
Because of this, the federal deficit is now expected to be $3.7 trillion for fiscal year 2020. That’s because we were already running a $1 trillion deficit before we added the $2.7 trillion in spending to fight the effects of the Wuhan virus. The federal debt held by the public, not the Federal Reserve, is set to rise above 100 percent of gross domestic product (GDP), a level not seen since World War II.
Speaking of, the Federal Reserve’s ownership of U.S. government debt has swung higher, from about $2 trillion of Treasury holdings to about $4 trillion. The Fed’s overall balance sheet stands at more than $6.6 trillion, consisting mostly of Treasurys and mortgage-backed securities, and the Fed is purchasing an additional $10 billion of Treasury securities per business day, a run rate of $2.6 trillion per year.
This should concern Americans for two reasons.
First, high debt may cause slower growth. Evidence points to a threshold at which indebtedness begins to sap the long-term growth of an economy, about 90 percent of debt to GDP. Growth at this point may fall by 1 percent, which doesn’t seem like much, but at a growth rate of 3 percent versus 2 percent, GDP per person will double in only 23 years versus 35 years. That’s a huge loss to American incomes.
For much of this country’s history, growth rates have been at 3 percent in real terms, and only since the 2000s has U.S. growth structurally fallen. That 1 percent difference for much of America’s history is a reason America has a world-beating economy, and higher growth also tends to be spread more evenly among the population.
One reason high debt might cut growth is that the overspending begins to eat up more of the nation’s resources. The interest cost alone on the national debt is already higher than half a trillion dollars. It’s projected that by 2023, we’ll spend more in interest on the debt than we do on defense spending.
High government debt also seems to have a relationship with low interest rates, reducing the cost of interest on the debt. But low rates don’t just enable government indebtedness. They cause excessive borrowing by households and corporations. As this debt gets too high, and investors reach for yield and take excessive risks, the private-sector debt pile becomes unstable.
All at once, euphoria or complacency gives way to panic, write-downs, and bankruptcies. The last 20 years of U.S. stock market history has seen two such manias and crashes, in tech stocks and housing. A third, corporate credit, might be underway. These crashes sap growth, as they cause long-lasting damage.
Looking at an even bigger picture, evidence suggests low rates reduce overall economic dynamism by incentivizing short-term investment over the long term. For example, when debt is cheap, it is much easier for existing firms to buy up their potential competitors, and studies have shown that eras of low rates lead to increased cartelization, or monopoly power, in the economy. Big firms able to access the bond market have a far lower cost of debt versus smaller firms that rely on banks for credit.
That brings us to the second problem caused by high debt: inequality. The increased concentration of power in the economy, along with U.S. trade policy, has worked with lower long-term investment in the U.S. economy to result in decades of flat real wages for many blue-collar jobs. That’s because blue-collar workers are uniquely exposed to both foreign trade and industries where long-term capital expenditure is required for productivity gains.
Think of it this way. An accounting firm needs only to lease a building, buy computers, and hire accountants. Its capital is mostly human and highly relationship-based. Although tasks are certainly outsourced — chiefly to India, in this case — there is a limit to what can be outsourced to cut costs, both from a legal and a business perspective. And these costs are mostly variable, meaning they can easily be turned on and off, at least relative to many other industries.
This is not so for a factory, where skilled humans are certainly necessary, but building the factory and adding production lines requires huge investment and fixed costs, which also necessitates certainty about long-term demand. Long-term demand, however, is sapped by debt loads, and the serial booms and busts create much uncertainty about the future.
Many blame automation for blue-collar America’s woes, but other highly automated countries have huge manufacturing sectors. There’s actually a relationship between higher automation, which allows workers to produce more, and higher real wages. The real problem is a lack of long-term investment, along with regulation, red tape, and competition from other countries with export-friendly currency policies.
To add insult to injury, the middle and working class can no longer rely on banks for their savings, and have been funneled into the volatile stock market. The system of high government debt and Federal Reserve interventions is great for the super rich, who own most of the financial assets. The Fed’s asset purchases have injected $6.6 trillion and counting into the financial system. Despite the ups and downs, prices of financial assets have greatly outpaced wages, so the rich get richer.
But unlike the rich, middle- and working-class Americans have a very specific timeline for their investments, which they need to begin to pull out at a certain time in order to retire. Despite the momentous upswing in stocks since bond yields began falling in the early 1980s, two 50 percent crashes have occurred since 2000. It can take well mor than 10 years just to make your money back, in real or inflation-adjusted terms, after such a crash.
On the other side of the same coin, low rates destroy a fundamental building-block of the American middle class: a return on savings. Middle- and working-class Americans never used to depend on the stock market for their nest eggs. Instead, our forebears bought bank certificates of deposit and plugged their money into savings accounts, which at least kept pace with inflation and likely exceeded it.
People who aren’t concerned by the debt argue America’s debt reached this level during World War II, just before a multi-decade economic boom. That comparison is wrongheaded. For one, America’s current debt level is set to surpass that World War II record due to entitlement spending. Entitlement spending goes on forever, while World War II did not. Right now, unfunded liabilities, meaning the cost of current entitlement spending and future projections, total $75 trillion.
In contrast, while World War II government spending totaled about 50 percent of GDP at the peak, it was brought well below 15 percent almost overnight once the war ended. President Harry Truman’s Keynesian advisers told him that reducing government spending this quickly would cause a relapse into the Great Depression. Instead, the opposite happened.
The resulting boom was equally driven by households that had built up ample savings, partly from a lack of consumer goods to buy during the government-led mobilization to produce for the military. All this occurred during an era of sky-high tax rates. This is clearly not the situation today, although lessons can be learned.
Democrats talk about raising taxes to pay for the debt, while many Republicans talk about growing our way out of the debt through simple tax cuts. Neither will work, because the debt is driven by a spending problem. None of this is to say Congress shouldn’t have fought back against the coronavirus downturn. The time to overspend is during a crisis, but a trillion-dollar deficit going into a crisis is unacceptable.
America needs a serious conversation about what we do with spending once this crisis abates. One small step might be to stop giving wealthy retirees entitlements. Another step would be shifting the focus of our discretionary spending away from the military-industrial complex and left-wing special interest groups, and toward rebuilding factory-America, including infrastructure and fair competition for firms producing things in the United States.
A return of better-paying blue-collar jobs would result in stable families, higher household incomes, and more tax revenue. The Republican Party needs to move beyond prioritizing tax cuts and greater defense spending above all else.
Ultimately, ending America’s malaise may involve deeper issues than taxing and spending. The simplest way for America to fix the entitlement problem is to have more kids, especially blue-collar kids. They have been under particular assault and duress in the last 50 years, starting from their time in the womb, and their fortunes are tied to their parents’ economic and family formation prospects. America must develop serious policies to remove childbearing penalties.
Sadly, it all fits together. It’s no mistake that U.S. birth rates have plummeted since Roe, which is about the same time America opened up manufacturing to foreign competition, expanded the welfare state, ended the monetary restraint brought by the Bretton Woods gold standard, and began importing low-skilled foreign labor. Undoing the tangled mess starts with the American family.
First of all, the numbers are wrong. Pre virus, the expected deficit this year was 1.1 trillion. Stimulus was about 2.4 trillion. The part that generates the real error here is that the original 1.1 trillion presumed economic activity that would generate tax revenue of an amount that partly offset the spending that created 1.1 trillion deficit.
We aren’t going to have that economic activity. It doesn’t matter if you’re locked down or not. There is no functional economic difference between lockdown and people choosing not to infect themselves at a crowded restaurant. They are the same thing economically.
So airlines will have a huge loss this year. The oil industry will have a huge loss mostly from low oil price. The cruise industry is crushed and will not be a contributor tax revenue. Sports are dead and probably will stay that way and they won’t be paying any taxes either. Disneyland Shanghai just reopened with a limit of 20% on park capacity. They’ll probably shut down again when it’s clear people are not going to come into crowds and infect themselves.
So the number is 3.7 trillion and it’s wrong and it’s wrong low. You might want to call it more like 4.7 trillion. In Phase 2 of stimulus is coming. Might want to tack on another 2 trillion.
6.5 trillion is a reasonable guess for this year’s deficit. GDP will shrink substantially and a reasonable estimate of that would be 17 trillion, down from 21.5.
After this deficit the national debt will be about 28 trillion. Our debt to GDP ratio, best not to think about that.
Well, at least Bill Gates is happy ...
Where are the “roaring out of it” , “stronger then ever”, etc. Freepers? The ones who insisted that healthy people be locked under tyrannical rule? Those lines where always there fallback.
Not good. I bless those that need government assistance for disabilities and those that take their well earned SS payments. The big issue is entitlement payments for healthy people over a long term. This can not last. God bless!
The sky is falling, the sky is falling, STILL waiting......
Talk about a HOAX!
Just monetize the debt, end of non-problem.
“6.5 trillion is a reasonable guess for this year’s deficit. GDP will shrink substantially and a reasonable estimate of that would be 17 trillion, down from 21.5.”
The shutdown was a disaster. It never should have happened. Our children’s children will be paying for this fiasco long after we are gone.
While one can quibble about the numbers (like arguing how tall the iceberg was that sunk the Titanic), the bottom line is our debt as a nation is growing exponentially and there will be a price to pay for that. The article does a decent job of detailing the consequences, which are real.
There will be a day of reckoning!
Democrats talk about raising taxes to pay for the debt, while many Republicans talk about growing our way out of the debt through simple tax cuts. Neither will work, because the debt is driven by a spending problem.Bring Out Your DeadAnyone who's taken so much as a single Home Ec class knows that a family budget requires keeping spending below income.
Eh? They don't teach Home Ec anymore??? When did that happen? WHY?
Post to me or FReep mail to be on/off the Bring Out Your Dead ping list.
The purpose of the “Bring Out Your Dead” ping list (formerly the “Ebola” ping list) is very early warning of emerging pandemics, as such it has a high false positive rate.
The false positive rate was 100%.
At some point we may well have a high mortality pandemic, and likely as not the “Bring Out Your Dead” threads will miss the beginning entirely.
*sigh* Such is life, and death...
If a quarantine saves just one child's or one old fart’s life, it's worth it.
>>Democrats talk about raising taxes to pay for the debt
So basically the Democrats want to take back those $1200 checks we just got
Because it stereotypes wymyn into pidgeon-holed gender roles which are subservient to the PATRIARCHY!
And sooo much more. Every year. Forever.
That, and voters who know how to budget are less likely to vote for liberals...
“exponentially “
No, it is not. I don’t think you know what an exponential is.
If Liz Warpath Warren is Joe Biden’s running mate can we call her an Indian Giver?
Yep. That would be just about the nicest thing I’d call her...
The graph says it's been dead linear since the last few days of March.
Linear. What's up with that???
“Not good. I bless those that need government assistance for disabilities and those that take their well earned SS payments. The big issue is entitlement payments for healthy people over a long term. This can not last. God bless!”
The issue isn’t the receiving of government assistance. It is insisting on tyrannical lockdowns while safely ensconced in the government’s arms. The issue is people who are not working, safe at home and collecting a monthly government guaranteed check, while insisting that others be locked out of the jobs and businesses.
Well, there will be upheaval, but a substance created from nothingness (money, from the Fed) can’t possibly be something that kills anyone since you can just change those numbers by decree.
What is happening is money is becoming meaningless. The virus will be the excuse, but it was underway regardless.
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