Even economists have to keep track diligently these days on how much governments are falling over their feet to spend the living daylight out of their fiscal households. In America, a gargantuan 2 trillion bill to respond to the health emergency was passed by Congress and signed into law by Donald Trump. The concept of a budget deficit is in the process of literally being thrown out of the window. By current estimates, deficits will blow way beyond the once frightening readings of the financial crisis.
So, what does that mean for this year’s US budget? Even before the outbreak, Washington was well on track for a trillion-dollar deficit. Add to that the 2 trillion just announced, most if not all of it is destined to be spent this year. Then, what needs to be considered is that the economy runs on empty and estimates of lost tax revenues run in the 1-2 trillion. Make that a round number, and you end up counting up to 5 trillion dollars in deficit this year. That is roughly 1/4 of GDP, mind you…!
How long can America and the world afford such a state? Even at the chance of this being a one-time event, the system will be tested to the bone. This too shall pass, or so you read everywhere. But the 64-million dollar question is how America will be able to deal with the crisis. China seems to have it under control, fingers crossed. Europe has given us a glimpse of what happens when liberal democracies show signs of complacency and aren’t collectively on the case from day one.
America, however, seems to have missed the boat altogether. Even Trump’s attempts to ignore the warnings and bolster the population’s mood have soberly been overwritten by his confession that more aggressive measures need to be imposed to fight the crisis. Still, no one can know how this will eventually pan out. Horrifying estimates of deaths are already being socialised through the media, to prepare the masses for what’s to come.
The human impact is only one side of the equation though. If economic and financial systems cannot be restored, America will run into problems of different sorts. 4-5 trillion in the red for this year may only be the beginning of a much more severe spending spree that will be necessary. Geopolitically, it is unfortunate for the Eagle to run into such troubles while the Dragon is on the rise again. It also appears that China is managing to exploit the crisis for its advancement in crucial technologies such as artificial intelligence.
We should be under no doubt that China will eventually surpass America, economically as well as technologically – virus impact or not. When Wuhan and the Hebei region, an epicentre of the country’s high-tech manufacturing base, got struck down, it might have been equal to providing the Washington hawks with a more than necessary breather, as in the crisis would set back China as the declared strategic competitor and bring some relief to the American position.
But now the Chinese machinery is gearing up again. The strategic competitor is getting stronger at the time when America is starting to hunker down. Apart from going nuclear and creating geopolitical volatility to deflect from a relative disadvantage in the making and the perils of losing its sole superpower status, Washington has only one other option. America needs to more or less emulate China’s state-sponsored system and re-discover its competitive edge on the basis of its own government support.
This means more spending beyond the numbers mentioned above. Estimates would vary, but my sense is that there are at least another 1-2 trillion dollars that need to be raised to tackle this and a number of related issues, including basic infrastructure and technology R&D. To be sure, this would not exclusively be a hit in 2020 and distributed across a number of annual budgets. But you get the picture… we are talking about this and the next government to contemplate a total facility of up to 7 trillion by this measure.
National debt of 30 trillion has quickly become a quasi-reality. Needless to say that the Treasury market will choke trying to swallow such quantities, however deep it may be. In the end, it will have to be the Fed proceeding hand-in-hand with the Treasury, ie debt will have to be assumed by the central banks’ balance sheets and probably be monetised and cancelled at one point down the line. Until then, however, the pressure will persist, and we all have to think long and hard what this will do to the dollar down the line.