Wsahington: The United States is embarking on a rapid-fire experiment in borrowing without precedent, as the government and corporations take on trillions of dollars of debt to offset the economic damage from the coronavirus pandemic.
The federal government is on its way this year to spending nearly $4 trillion more than it collects in revenue, analysts say, a budget deficit roughly twice as large relative to the economy as in any year since 1945.
Business borrowing also is setting records. Giant corporations such as ExxonMobil and Walgreens, which binged on debt over the past decade, now are exhausting their credit lines and are tapping bondholders for even more cash.
To support such borrowing, the Federal Reserve has dropped interest rates to zero and added more than $2 trillion of loans to its portfolio in the past six weeks - as much as in the four years following the Great Recession.
All this borrowing is required to plug the gaping hole the novel coronavirus has punched in the economy, as unemployment reaches levels not seen since the Great Depression. Few, if any, prominent economists or lawmakers opposed opening the government’s fiscal taps amid the current economic emergency. The Senate last month approved $2 trillion of crisis spending with a vote of 96 to 0.
Rising debt loads
Yet high debt loads already are straining many corporations, which may be forced to choose between skipping loan payments and laying off workers. Millions of consumers, too, face sizable monthly bills for student loans and credit cards, a burden that could weigh on any economic rebound.
The reliance on so much debt also will leave scars after the pandemic passes, economists say, making it difficult for policymakers to withdraw support and leaving the economy more vulnerable than before this crisis began.
“We should be very worried,” said Atif Mian, an economics professor at Princeton University who has written widely on the subject. “We are talking about a level of debt that would certainly be unprecedented in modern history or in history, period. We are definitely at a tipping point.”
On the eve of the pandemic, the U.S. economy was humming, thanks in part to a jolt from the 2017 tax cut and the subsequent end of congressional spending limits. But Congress took those actions without any plans to pay for them.
Governments and companies often turn to lenders during times of unexpected duress. This new wave is different because it follows an era of heavy borrowing.
For President Donald Trump, debt is a familiar tool. The former real estate executive once bragged that he was “the king of debt” and suggested haggling with holders of U.S. Treasurys over repayment terms using hardball techniques he had honed in the business world.
Treasury Secretary Steven Mnuchin said last month that the government must spend freely to help workers and businesses hurt by official shutdown edicts. “Interest rates are incredibly low, so there’s very little cost of borrowing this money,” he told reporters. “In different times, we’ll fix the deficit. This is not the time to worry about it.”
More spending needed
Some argue that even more spending is needed to save the economy. Economist Joseph Stiglitz, a Nobel laureate, says the government should guarantee workers’ pay and forbid evictions or foreclosures. Larry Fink, the chief executive of BlackRock, a New York-based investment firm, told CNBC last week that an additional $1 trillion may be needed for small businesses.
But once the coronavirus has been tamed and the country regains its swagger, U.S. leaders will need to find an exit from the extraordinary levels of government borrowing.
Building a consensus for the blend of tax increases and spending cuts needed to shrink the mammoth post-crisis debt will be tough to manage. Neither political party emphasized spending limits in recent years. And the presumptive Democratic nominee for president, former vice president Joe Biden, proposed relatively modest tax increases compared with his former rivals. Republicans, meanwhile, reflexively oppose tax hikes.
The Fed, likewise, will face difficulty extricating the economy from today’s elevated levels of financial support. The Fed had only partial success in unwinding its efforts to buttress the economy after the 2008-2009 crisis before the pandemic drew it back into an emergency posture.
Economists typically worry that excessive debt could lead to a crisis triggered by investors’ suddenly concluding that they will not be paid their promised returns and starting a fire sale of government securities, causing interest rates and inflation to soar. That scenario has afflicted numerous smaller economies. But such an outcome seems less likely for the United States, given the primacy of the dollar in the world economy and the country’s long track record of relative economic stability.
US debt addiction
Still, for four decades, the U.S. economy has grown steadily more addicted to borrowed money. Total government, business and household debt now exceeds 250 per cent of annual output, three-quarters greater than in 1980, according to government statistics.
To Mian, the author of “House of Debt,” which examined the role of household debt in the 2008-2009 financial crisis, the U.S. debt burden will reshape the economy in subtle but powerful ways.
An era of perpetually ultralow interest rates distorts the economy by eliminating the traditional market discipline that discriminates between worthy investments and unprofitable ones. If money is virtually “free” for many years - as it has been since 2008 - even bad ideas can attract financing.
As the United States once again turns to debt to rescue the economy, it is locking in a future of lower growth. The national credit card is being used largely to stop today’s financial bleeding, rather than for investments - in the medical system, infrastructure and education - that would boost future growth.
Japan has been stuck in an endless loop of disappointing growth, low interest rates and mounting debt, and the United States could face a similar future.
The United States is ensnared in a “debt trap,” Mian said.