Most serious people and governments know that you cannot just spend. You also need incomes to cover the spending. As Franklin Roosevelt found out in the thirties (and later rationalised theoretically by Keynes), government borrowing and spending for a period can be necessary to avoid the deepening of a crisis, or to fight a war. But this cannot be done at scale endlessly without serious consequences, most importantly a spiralling national debt.
The US and most other countries in the world ran huge deficits during the 2009 financial crisis and again during the Covid emergency. It helped avoid a catastrophic melt-down of the economy. Since then, most countries have reigned in their deficits somewhat. But many still run high deficits, and here the US stands out.
During the Covid emergency, US Government revenue plummeted and spending exploded, leaving a deficit of 14.7% of GDP for 2020 and 11.8% for 2021. As the economy revived post-Covid the deficit also came down somewhat. It was reduced to 5.3% in 2022, but it is now increasing again. In 2023 the deficit is expected to reach 7.4% and only come down marginally next year to 5.9%. As remarked by Forbes, “this is the first time government spending has remained so high amid a persistently strong economy”. The Congressional Budget Office (CBO) expects the deficit to continue at around 6% of GDP for the next decade (and reach around 10% in 2053). If this had been a Latin American country, the US politicians and commentators would be talking with contempt about “Banana Republics”. But no, this is God’s Own Country.
This reckless policy is obviously reflected in an increasing public debt. US gross public debt reached 132% of GDP during the Covid epidemic, but the following years with high inflation hollowed out the value of the Government debt (and hence caused big losses for the owners of Government bonds) so this percentage is now down to around 120%. But as interest rates have gone up, refinancing of the debt is now more expensive, and payment of interest on the debt is an increasing burden for the Government. In 2023 the payment of net interests on the Government debt is reaching 659 billion dollars, corresponding to 2.5% of GDP. For comparison, the US military budget (which is more than the next 10 countries combined) was in 2023 around 840 billion dollars. Net interest payments may be higher than military expenditures as early as in 2026.
Source: https://www.pgpf.org/budget-basics/what-are-interest-costs-on-the-national-debt
The Biden administration is proud of the fact that the US until now, contrary to most of its allies, has avoided the recession foreseen by many. The Eurozone contracted in third quarter 2023 and is expected to continue to do so in the fourth quarter, and the same is the case for Japan. Sweden is already in recession, and so is Denmark. So on that background, the projected 2.5% growth of the US economy for 2023 and 1.2% for 2024 look good (even if US growth figures tend to be adjusted downwards later on when more reliable data are available). However, the higher growth in the US should not surprise, as it is closely related to the free-spending policy of the Biden administration. Even as the US Central Bank is suctioning up cash and keeping up the interest rate, the Government is spending as never before, thus keeping up demand. This is likely to continue (at least until after the 2024 presidential elections).
Of course, there are other countries that are worse off when it comes to the burden of interest payments, not because their public debt is higher, but because they don’t have access to the cheap financing that the US has. So in Brazil interest payments are over 8% of GDP, in Mexico 5.4% and in India 5.2%, despite that their debt in relation to GDP is much lower than in the US.
The challenge for the US is that the deficits are projected to continue. The dysfunctional political system where Congress can agree on spending but not on tax-hikes or spending cuts, means that the money printing will continue. This bizarre show is starting to look unsustainable. Even the US press that is supportive of the Biden administration is beginning to worry, as e.g. New York Times, but they still tend to conclude that interest rates will soon come down again and then the debt is not a big problem any more (as in this analysis from Goldman Sachs). They can point to the case of Japan where public debt to GDP is more than the double that of the US, but still interest payments are only 1.4% of GDP. However, this may be too optimistic as the savings rate in Japan is extremely high and the interest rate on a 20-year government bond is 1.5% (with inflation presently running at 3%).
Mike Johnson Republican, Speaker of the US House of Representatives, and President Joe Biden are bickering about the priorities for more spending: Ukraine or Border Control Not about how to finance it. That’s the easy part: the money printing press.
The challenge will be if the US follows Europe and Japan into recession in 2024, which many think it will. Reuters reports that “Investment banks and asset managers have (…) deep division over whether the U.S. economy will enter a long-heralded recession and drag the world with it”. The indicators I mentioned two years ago, which are signs of market bubbles (mainly the real estate market and the stock market), have not changed, and these bubbles will have to deflate at some moment – be that as a sudden popping (crisis) or slowly fizzling out (so-called “soft landing”).
The normal reaction from the politicians in case of a recession or crisis is to increase spending once again to stave off a full-blown crisis. This would imply increasing further the already high deficit. That would definitely put the US on an unsustainable path, even in the short run.
Add to this the US belligerent policy towards China, Russia and part of the Global South. US treasury secretary Janet Yellen says confidently that the US can ‘absolutely’ afford two wars (Ukraine and Gaza), but others, noting that the US may end up with wars on even more fronts, are not so sure. So things start looking complicated for the US. And it’s not only me saying it.
