In the past four years, U.S. government debt has increased by $7 trillion to $21.6 trillion. President Joe Biden has committed to a spending program that could add $1.9 trillion more in the year ahead. At 100.1% of gross domestic product, the debt already exceeds the annual output of the economy, putting the U.S. in company with economies including Greece, Italy and Japan.
In the 1990s, economists argued that surpluses would push down long-term interest rates and encourage private-sector borrowing and investment. The U.S. saw an economic boom, with the longest expansion on record at the time, fueled by technology investment. After years of low inflation and interest rates near zero, more economists say the government should be borrowing to keep the economy going. With borrowing costs expected to remain low and the pandemic-stricken economy still weak, increases in deficits is hardly a concern. But, who pays for this massive deficit?
Future Weath’s View
Most economists have been saying that we all have to pay for this eventually and that interest rates and inflation will rise, harkening back to the days in the 1980s when interest rates were north of 15%. But, deficits and government debt have been rising since 2000 because of increased spending and tax cuts, and interest rates kept falling. Fed Chair Jerome Powell even came out and said “while U.S. debt is growing faster than the economy, the level of debt is far from unsustainable”.
There are different theories about why that happened but there is no conclusive evidence of what is causing interest rates and inflation to stay low while the deficit has spiralled out of control. Someday, an economist will be awarded a Nobel Prize for coming up with a definitive proof or theory for this dissonance and will write a book or two about it.
But, in the meantime, Wall Street and the economy are getting a free lunch. U.S. debt is on track to double to nearly 200% of GDP by 2050. And incoming Treasury Secretary – Janet Yellen now says that such high levels can’t be sustained. She may be right but does anyone care?