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22 Mar, 2020 14:00

US debt crisis wasn’t supposed to happen until at least 2035. Covid-19 is rapidly pushing it closer

US debt crisis wasn’t supposed to happen until at least 2035. Covid-19 is rapidly pushing it closer

The overall price tag of the fiscal stimulus package in the US could be around one trillion dollars. With record budget deficits and its national debt at $23 trillion, is the US hastening toward a fiscal reckoning?

The Trump administration wants to send direct cash payments to Americans in the coming weeks to help them cope with the economic ravages of coronavirus, part of a massive relief package developed between the White House and Capitol Hill. The overall price tag of the package is more than $1 trillion, making it one of the largest federal emergency fiscal packages ever assembled.

Whether this is a temporary downturn or a full-blown recession, two things will happen. Tax revenues will fall as people’s income drops, and Federal spending will rise. The result will be higher deficits.

The US debt is soaring, and the country has kicked the can down the road so many times on entitlement spending. It may be entering into unprecedented and dangerous territory, and hastening a reckoning it has been trying to avoid.

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The statistics are astonishing. Last year, the official budget deficit – how much more money the government spends than it takes in – reached a trillion. The national debt went up $1.2 trillion to $23 trillion. According to the New York Fed’s quarterly household credit and debt report, household debt in the fourth quarter of 2019 rose 4.4 percent. Student debt increased to $1.51 trillion at the end of 2018. Auto loans rose to $1.3 trillion, while credit card debt rose to a record $930 billion.

While America heaves under this burden of debt, there is another historical measure at play: a rising debt-to-GDP ratio. This compares how much a country owes to how much it produces. In 2012, the percentage of debt to GDP passed 100 percent, for the first time since the Second World War, back when the country was basically one giant factory pumping out armaments and supplies. In 2019 the debt-to-GDP ratio was 107 percent. This means that, at the moment, the debt is greater than the economy itself.

Those are the figures heading into a national emergency requiring massive amounts of Federal spending. In the last couple of weeks, in a state of anxiety and gloom, the country has effectively gone into shutdown, impacting businesses of all sizes. The country will now be adding on a further trillion dollars in relief, with the economy expected to contract by as much as five percent this coming quarter. With plummeting tax revenues, and massive emergency spending, the debt-to-GDP ratio will likely go further above 100 percent.

What makes this scary is that it is possible, were there to be a protracted recession due to coronavirus, that the debt-to-GDP ratio could inch closer to or even go beyond the record level seen just after the Second World War, when it topped 121 percent. That the US might get nearer to such a level puts the country in a potentially dangerous situation, where it just has too much debt on its back, and the debt and interest become crushing. Last year, the country paid $600 billion just on debt interest, nearly 9 percent of its total spending.

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Before this latest crisis, the US was projected to run out of money to sustain entitlements – Social Security is expected to go broke by 2035. A sizable recession, falling GDP, a rising debt-to-GDP ratio – all threaten to narrow that time frame, bringing the country closer to the reckoning it’s been putting off for years.

The US is not alone when it comes to debt; and the global economy, wilting under the pandemic, will suffer, which has further negative implications for the US economy and the long-term outlook. Overall, the world is borrowing more than it is producing. Of particular concern is Italy, which has a debt-to-GDP ratio above 130 percent, and is one of the countries suffering the most from the coronavirus pandemic. The combination of these two elements will likely leave the country stricken for the foreseeable future.

Two questions are now facing the White House: will the unprecedented economic stimulus package be enough to prop up the economy in the long term, and is this kind of massive spending, on top of soaring debt and deficits and entitlement spending, pushing the US into dangerous territory, where the amount of debt and interest becomes out of control?

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