After Biden‘s inauguration as the president of the United States, the “Bidenomics” of economic countermeasures will emerge. The Biden Administration will propose a $1.9 trillion economic response to the new coronavirus (Chinese communist virus) and plans to increase fiscal spending by $10 trillion through infrastructure investment and other measures. The U.S. economy will use the huge investment to move toward growth recovery, but whether fiscal stimulus can bring sustainable growth will be tested to avoid saddling future generations with a heavy burden of debt.
According to estimates by the Committee for a Responsible Federal Budget (CRFB), an ultra-partisan U.S. agency, the size of fiscal spending under “Bidenomics” would reach $10 trillion over 10 years. The federal government’s debt (the private portion) is at a record high of $20 trillion. While a significant tax increase of $4 trillion over 10 years will be discussed, the debt will increase by $5.6 trillion over the current level.
Can the U.S., burdened with a huge debt, bear the fiscal burden of “Bidenomics”? The new Treasury Secretary Yellen stressed that “in a historically low interest rate environment, the U.S. fiscal margin remains”. 2020 interest payment burden of $338 billion, but long-term interest rates once fell to 0.5%. The Congressional Budget Office (CBO) estimates that government interest payments for 2021 to 2025 will be limited to $270 billion to $290 billion per year.
In this interest rate environment, due to the “Bidenomics” economic boom expectations and debt concerns, will face double upward pressure. The Congressional Budget Office believes that the long-term interest rate as of 2025 is 1.9%, but has now risen to 1.1%. Research firm Moody’s Analytics predicts that long-term interest rates will rise to 2.1 percent by 2022 and 4.1 percent by 2025, driven by “Bidenomics. The Due Diligence Federal Budget Commission also estimates that the interest payment burden will increase by $300 billion over 10 years.
The question is whether the fiscal stimulus will lead to sustained growth. Even the Congressional Budget Office estimate, which is predicated on a potential growth rate of nearly 2 percent, suggests that the federal debt will increase from $20 trillion to $33 trillion in 10 years, raising the ratio to gross domestic product (GDP) to 109 percent. This is due to the chronic deficit body of U.S. finances due to the increase in Social Security payments.
Moody’s analysis shows that “Bidenomics” will drive up interest rates, but the economy will also maintain high growth rates of up to about 7 percent until 2022. However, after 2024, growth will rapidly fall to about 2%, fiscal deterioration can not be stopped, and by 2030, the debt balance will reach 130% of GDP, 20 percentage points higher than now.
The International Monetary Fund (IMF) outlook shows that U.S. GDP will return to pre-coronary crisis levels in 2021 due to the effects of “Bidenomics,” among others. However, GDP growth will be lower than the scale of fiscal spending. According to an analysis by a U.S. research institute, the actual economic pull effect of the $900 billion stimulus measures finalized in December 2020 is only $660 billion.
A portion of cash disbursement, etc. becomes deposits, which cannot drive demand up, and there is a limit to the reliance on fiscal. Whether or not we can fully emerge from the new crown crisis depends on whether or not we can promote fiscal stimulus while simultaneously raising potential growth rates through structural reforms and reverting from a fiscal-led recovery to business-led economic growth.
New U.S. President Joe Biden (Reuters)
The factors that previously held long-term U.S. interest rates at historically low levels are also changing. Yellen noted that “dollar-denominated debt, which is a safe asset, remains small compared to the fast-growing world economy.”
Federal debt has increased twofold in the last 10 years, topping 100 percent of U.S. GDP by 2020. However, compared to global GDP, it has remained essentially flat at about 10 percent for about 60 years up to the New Crown crisis. The increase in the overall size of the world economy and the continued absorption of dollar-denominated debt as a safe asset for the foreign exchange reserves of emerging market countries and financial institutions has kept long-term interest rates at low levels.
The new crown crisis and “Bidenomics” will upset this delicate market equilibrium, potentially overturning the low interest rate environment that previously made huge debt sustainable.
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