In the good old days of January 2020, fiscal conservatives and libertarians were clutching their pearls over the return to unsustainable trillion-dollar federal deficits. The penny-pinchers, the tightwads, the cheapskates, and the cheeseparers were handwringing about the bipartisan abuse of the public purse. Today, armchair accountants could only dream of Washington recording a $1.1 trillion budget gap as the elevator doors from The Shining’s Overlook Hotel have unleashed a flood of red ink. In the future, when Americans receive a tax bill to cover the cost of this emergency spending, the IRS will have a message in each letter, “Here’s Johnny!”
Red Is the New Black
The federal government was already on a dreadful fiscal trajectory before the Coronavirus pandemic prompted Washington to scream, “Damn the torpedoes, full speed ahead!” The Treasury Department revealed before the Easter weekend that the budget deficit ballooned 8% in the first half of the 2020 fiscal year, topping $743 billion. This was the largest budget shortfall for the October-March period since 2012.
According to the Committee for a Responsible Federal Budget (CRFB), Washington’s arrears will hit $3.8 trillion this year, four times larger than the $984 billion shortfall posted last fiscal year. The non-partisan group, which advocates for lower deficits, warns that the expanding red ink will force the national debt to surpass the size of the entire U.S. economy. And these are the best-case scenario numbers!
The CRFB said in a statement:
“These projections almost certainly underestimate deficits, since they assume no further legislation is enacted to address the crisis and that policymakers stick to current law when it comes to other tax and spending policies. The projections also assume the economy experiences a strong recovery in 2021 and fully returns to its pre-crisis trajectory by 2025. Assuming a slower and weaker recovery (but no changes in the law), we estimate debt would grow to 117 percent of GDP by 2025.”
The figure is comparable to Goldman Sachs’ recent forecast that predicted a $3.6 trillion gap, which did not consider additional expenditures being discussed between Republicans and Democrats. The Wall Street titan also warned that the economic downturn would be four times worse than the financial crisis more than a decade ago. Though, in an apparent attempt to lift our spirits, the bank anticipates an “unprecedented recovery” in the second half of this year.
Either way, the projections will exceed former President Barack Obama’s record $1.4 trillion deficit in 2009 and former President Franklin Delano Roosevelt’s obscene budget holes.
Going to War
The White House is exploring a number of tools to help raise cash to cover the unprecedented levels of spending. One idea floating around is a Corona Bond, a Coronavirus-related Treasury bond to pay for relief efforts. Larry Kudlow, President Donald Trump’s chief economic adviser, confirmed to reporters that “we’re just looking at it,” though he expressed support for the proposal in a CNBC interview:
“This is a time, it seems to me, to sell bonds in order to raise money for the war effort. In this case, the pandemic effort. In this case, the effort to keep families and individuals in businesses afloat. This would be a long-term investment into the future of American health, safety and the economy. From my standpoint, technical considerations aside, I think the concept is exactly right.”
Former Federal Reserve Chair Janet Yellen agrees, telling the business news network that “a war bond is an appropriate approach” to finance these enormous deficits.
There is further speculation that long-term Treasurys are back on the table. Earlier this year, Treasury Secretary Steven Mnuchin announced that the U.S. government would be issuing 20-year notes instead of following the path of several other countries and selling 50- and 100-year bonds. Of course, this was before the Coronapocalypse, so the options could be deliberated again. Could a century bond be in America’s immediate future?
In the meantime, Mnuchin will most likely increase auction sizes of the current inventory of Treasury maturities and get bailed out by the financial markets. In a yield-starved environment, it is anyone’s guess if it would be enough to cover the tab. With so many other governments around the world set to flood the bond market with bills and notes, investors might not have a ravenous appetite for a buffet of debt.
Party of All
The U.S. can take solace in the fact that every country affected by the Coronavirus is enduring the same pecuniary hardships. Canada’s budget deficit is projected to hit $180 billion, the United Kingdom is bracing for a $240 billion shortfall, and Australia and France’s gaps will surge to 8% of gross domestic product. So, America is not alone. That does not make the pill any easier to swallow unless that capsule numbs the torment. It turns out that spending money you do not have and shutting down the nation has economic consequences, and it proves your grandmother’s advice: Save for a rainy day!
Read more from Andrew Moran.
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