Is the US economy even an economy any longer? Even Jerome Powell conceded that we would not go back to the same economy, but what does one call the construct of a gross domestic product that can only be kept afloat and from imploding by injecting gargantuan amounts of fiscal and monetary funds? On its own, America would long have contracted considerably more amid a twister of recessions since the financial crisis over 10 years ago, and particularly in the wake of this year’s health crisis.
The US Treasury Department revealed last week that October’s federal budget deficit has been marked at -284 billion dollars. Accumulated over the first 10 months of this year we are holding at a -3.06 trillion deficit. The 12-month rolling number is even higher, at -3.28 trillion. Government receipts and expenses are still diverging at a record pace. Looking at the chart, the period of 2008-10 when the financial crisis was doing its worst, it looks like a blip in comparison to 2020.
Trillion-dollar deficits aren’t exactly a novelty. Post the financial crisis, and particularly during Donald Trump’s presidency, America was gradually building up its fiscal shortfalls. 2017 was well in excess of -500 billion, 2018 hit roughly -750 billion, and 2019 came out at -1 trillion. You could argue that Trump’s economic miracle was nothing really of the sort. The growth he so proudly produced was predominantly built on credit and less so on generic economic activity.
Even absent the Covid crisis the Trump White House had already cultivated a further run-up in deficits and socialised the notion of an annual -1 trillion dollar shortfall to deliver on the nominal growth headlines and the president’s self-proclaimed business acumen. Evidently, that horse has bolted now with the lockdown in April and May, and the government and the Fed have since been in a state of emergency to prevent the ship from sinking.
If we are lucky, the annual deficit might come out just shy of 4 trillion this year which, considering the circumstances, may not yet be that catastrophic. The estimations in this space have been worse than that number. Similarly, America’s national debt will probably not reach 30 trillion by the time a new president will be inaugurated. We currently stand at 27.2 trillion. Admittedly, Expertise Asia”s earlier forecasts were maybe a tad racy.
But there is always 2021. The steeply rising Covid cases do not bode well for any material improvement. Biden advisor Michael Osterholm’s called it “Covid hell” to come and for a 4-6 week lockdown. Another advisor, Celine Gounder, referred to Thanksgiving travel as “pouring gasoline on a fire” but more eloquently likened the measure to a
dimmer switch of restrictions instead of an on-and-off button. Well, a lockdown in whatever shape will cause fiscal and monetary actions to be stepped up again.
In this case, we are likely to have a replay of this year’s Q2 in the coming Q1. The Fed is likely to lend its helping hand yet again and print another few trillion to paper over the cracks. And that would still not account for the additional trillions in funds to re-launch the economy and finance absolutely crucial programs such as infrastructure in the first place. At this point, it is anybody’s guess where an annual deficit might come out in 2021, but the stars seem to be aligned and a new record is quite possible.
I come back to the initial question. Is what we are talking about here still an economy in the traditional sense if it degenerates into a construct on life support provided by ever more deficits, financed by ever more debt, a debt that will evermore have to be vacuumed up and probably be retired by the Fed, as even the world’s deepest market cannot digest these kinds of supply proportions? Some call it a defunct system, others Modern Monetary Theory. I leave the answer to the readers.
