Inconvenient Truths About US Debt Explosion

Figure 2  Confirmed COVID-19 Cases by Regions, through July 11, 2020

Source: WHO

There was nothing inevitable about this trajectory. In January, first virus cases surfaced in both the US and Canada. The former delayed an effective response; the latter mobilized more effectively. By mid-July, US will have close to 3.5 million cases and almost 140,000 deaths; in Canada, the comparable figures are likely to remain lower than 110,000 and below 9,000, respectively.

Due to the central role of the US in the global economy, the pandemic failure will severely compound collateral economic damage – including the coming debt crises.

Federal debt surpassing WWII record

In the past two quarters, the early economic defense has been by the major central banks to cut down the rates, inject liquidity and re-start major asset purchases. Moreover, a rare bipartisan consensus allowed the Congress to pass the $3 trillion stimulus to avoid a more severe collapse in the spring. But another package will be needed later in the summer.

Once again, major advanced economies are hoarding new debt to defuse short-term economic challenges, which will drastically worsen their longer-term debt challenges. 

Following the 2008 contraction, US debt-ceiling crisis climaxed in fall 2011. That’s when federal debt was still $14 trillion; now it has almost doubled (!) to $27 trillion.

At the end of World War II, US federal debt-to-GDP ratio was almost 120%. Thanks to the secular growth potential in the US and global recovery, it was reduced relatively fast. Today US debt-to-GDP ratio – if real-time data were to be included – has likely surpassed the wartime record, but in peacetime conditions (Figure). 

Figure 3  US Federal Debt surpasses WWII record

US economy was in secular stagnation already before the coronavirus contraction. Consequently, it lacks long-term growth potential to reduce that debt. Moreover, the volume of federal debt will continue to climb, and so will the debt-to-GDP ratio.

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Based on Dr Steinbock’s briefing on July 10, 2020

Disclaimer: Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. ...

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