Ready, Brace


In a recent Wall Street Journal article, the reporter Greg Ip notes the anomalous fiscal situation the US finds itself in, after Congress had recently approved the fourth Covid aid package at USD 484 bln. For the current fiscal year, Ip writes, the estimated federal deficit will post at USD 3.8 trln, a level approximating about 18.6% of US GDP, a bends-inducing fiscal shortfall.

Ip writes that, given the new fiscal burdens, the research group the Committee for a Responsible Federal Budget predicts that the total federal debt will correspond to roughly 106% of US GDP by 2022. Have extraordinary fiscal commitments during extraordinary Covid times brought us to closer to the edge? Is the US staring into the fiscal abyss?

Not so fast, apparently. That same committee, as Ip reports, elaborates that the US ability to service that debt won’t be so punitive, at least as circumstances stand. The debt service burden arising for the total federal debt is expected to amount to about 2% of country GDP on an annual basis – this, in the world where the US government 10 yr. bond clears below 1% and US inflation remains agreeably subdued.

The chart attached citing data from the US Federal Reserve Bank highlights the relatively modest debt service burden the US has shouldered for some time, even in the midst of the fiscal knock-on effects from the Global Financial crisis during the new century’s first decade. But, that said, Covid has provoked such a sheer volume increase in federal leverage, that the immediate environment post-Covid can’t be anything but bracing for policy makers and the global credit markets.

Of critical importance, what’s bracing for everyone is the realization that the “center” for low inflation and low yields must hold, or the fiscal picture could well become undone. And this center will hinge, at least in part, on perceptions and sentiment that consumers & investors, and savers & lenders, have on the circumstances describing post-Covid. It’s an ineffable tautology: the subdued environment for inflation and yield will depend on perceptions and sentiment informed by a subdued environment for inflation and yield.

To ensure that the dynamic starts to whir in the post-Covid world, I would say that there needs to be a significant “spark” or effective premise all stakeholders accept as being true. That might be, for example, broad and enlightened de-regulation – as perceived in the markets – that primes economic growth, and enhances the likelihood of moderation in federal fiscal leverage. Of course, something like this might require across-the-aisle understanding and fewer bitter partisan stands. As one world leader is wont to say about things, “We’ll see what happens.”

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