US Budget Deficit Balloons by $1.1 Trillion: Is America’s Massive Debt Bubble About to Burst?
15:07 GMT 13.04.2023 (Updated: 19:00 GMT 13.04.2023)
© AFP 2023 / ANDY JACOBSOHN
Subscribe
The US is the most heavily indebted nation on Earth, with the national debt standing at over $31.7 trillion, or 125% of GDP. When accounting for personal, local and state obligations, the figure is triple that – $95 trillion – equivalent to the GDP of the whole planet. How big is the danger of this debt bubble bursting? Sputnik explores.
The Congressional Budget Office released fresh figures this week revealing that the federal budget shortfall had reached $1.1 trillion in the first half of fiscal year 2023 - $430 billion higher than it was during the same period in 2022.
Simply put, the federal deficit is the amount the federal government spends above whatever taxes, tariffs, and other revenues it manages to wring out of the population, corporations, and foreign governments in a given period. When spending exceeds income, the state makes up for it by issuing Treasury bonds (debt obligations) or printing money.
The 2023 deficit is not the highest in US history or even in recent years, with both the Biden administration and its direct predecessors, the Trump, Obama and Bush teams presiding over multi-trillion dollar deficits as the feds pumped pallets of cash into the economy during COVID and the 2008 financial crisis.
But this time things may be different. Unlike 2009-2011 and 2020-2021, the spike in the deficit isn’t related to a clearly observable economic collapse. The economy is supposedly doing great, according to Treasury Secretary Janet Yellen. The “US economy is obviously performing exceptionally well,” she said at a press conference Tuesday. “So I’m not anticipating a downturn in the economy, although of course that remains a risk,” Yellen added.
Instead, the CBO blames declining revenues (-3%, or -$73 billion) and spiking spending ($3.1 trillion, or +13%) for the jump in the deficit. The loss in revenues has been attributed to dropping income and payroll tax receipts (-2%, or -$33 billion), a drop in customs duties (-15%, or -$7 billion), and a hefty drop in remittances from the Federal Reserve accrued from interest rates (from $61 billion at this time in 2022 to less than $1 billion now).
But the government did apparently make good on last year’s promises to hire an "army" of IRS auditors, with the collection of corporate income taxes jumping upward by 10%, or $13 billion, estate and gift tax receipts climbing by $7 billion (50%), and collections of miscellaneous fees and fines also spiking, increasing by $5 billion (a whopping 54%).
The 13% jump in spending is accounted for by a variety of spending, from Social Security, Medicare, and Medicaid benefits (spiking by 10%, 14%, and 8%, respectively), as well as interest payments on federal debt, which jumped by a whopping 41%, or $90 billion, compared to 2022 due to higher interest rates. The Federal Deposit Insurance Corporation – the independent government agency designed to maintain public confidence in the banking sector, also saw outlays rise by $29 billion in the wake of the recent collapse of several big corporate banks. The Department of Education also accounted for a big chunk of spending, with outlays jumping by $53 billion, or 75%, attributable to the Biden administration’s pause on student loan payments.
Deficit-Shmeficit
The spike in the deficit is nothing new in American political life. The government hasn’t run a budget surplus since the late 1990s and early 2000s, when a series of cuts to the budget, including a drop in military spending thanks to the so-called post-Cold War "peace dividend," allowed the feds to run modest budget surpluses of 0.8 to 2.3 for four straight years. Before that, the last surplus occurred in 1969 during the Johnson administration, and before that by the Eisenhower administration during three of his eight years in office between 1953 and 1961.
How can Washington afford to get away with running budget deficits and racking up debt year after year and decade after decade – despite being compared by some economists to a giant Ponzi scheme? The logic has been simple: in theory, low interest rates on debt and steady economic growth will mean that debt grows more slowly than GDP, meaning debt may, theoretically “eventually become negligible relative to the size of the economy.”
“The catch,” wrote Johns Hopkins economist Laurence Ball and his Harvard colleague N. Gregory Mankiw in a prophetic 1995 explainer, “is that the future paths of interest rates and GDP are uncertain.”
“Although interest rates on government debt have usually been less than the growth of GDP, these variables fluctuate. It is possible, although not especially likely, that the economy will experience a run of bad luck – say a major depression – in which the growth rate drops below the interest rate for a sustained period. In this case, a policy of rolling over the debt will cause the debt to rise faster than national income. Eventually, the debt may become so large relative to the economy that the government has difficulty selling it, forcing a tax increase or spending cut. Moreover, these adjustments are especially painful: they are large, and they come when the economy is already suffering from a problem that has caused the debt-income ratio to rise,” the economists warned.
Judging by developments over the past decade or so, the US may be close to reaching the point where the size of its debt relative to the overall economy reaches a critical breaking point. Judge for yourself:
The US debt-to-GDP ratio surpassed 100 percent in 2013, when both hit about $16.7 trillion. While nominal GDP has grown by about $9 trillion in the 10 years since, the debt has nearly doubled, to $31.7 trillion.
Economics 101 dictates that a high debt-to-GDP ratio has a number of negative impacts on growth, deterring investors and reducing the likelihood of individuals, investors, and nations lending to a country, given the risk of the debtor not being able to pay off their debt.
The United States has experienced periods of high debt-to-GDP ratios before. During and immediately after the Second World War, the ratio hit 114% in 1945 and 119% in 1946, respectively. But the situation today bears one important difference from what it was then: while the American industrial base accounted for over half of all manufactured goods produced in the world in 1945, today it accounts for about 16 percent and dropping. On top of that, after World War II, wide swathes of Europe and Asia lie in ruins, eagerly purchasing goods made in the USA, partially using generous subsidies afforded by the post-war Marshall Plan. Today, there are no waiting markets eager to accept US industrial output. Perhaps it is the desire to return to the "good old days" that accounts for Washington’s recent efforts to liquidate Europe’s manufacturing economy and plunder its industrial base.
The US is on the precipice of a bleak milestone: according to economists, the cost of financing the US’ gargantuan federal debt reached $475 billion in 2022 – its highest dollar value ever, and is expected to reach levels so high in the coming decade that it will surpass crucial programs like Medicaid and defense, and become the largest single spending item in the budget within 30 years.
Traditionally, the US has been able to rely on four key pillars to keep its economy on top: its technological edge, effective control of global financial organizations via Bretton Woods institutions like the International Monetary Fund and the World Bank, the petrodollar, and the US military – which stands ready to eliminate challengers to its global economic preeminence (see Muammar Gaddafi and his gold-backed dinar idea).
Today, all four of these pillars are under pressure, with the People’s Republic of China closing the gap on the US technologically, and the petrodollar at risk as nations (including key US allies) switch to emerging alternatives or currency swap trade. The international financial institutions that the US helped create, meanwhile, appear to show signs of going rogue, refusing to toe the line of State Department propaganda on Russia’s “crumbling” economy, instead projecting its growth by 0.7% in 2023.
The future looks bleak for the US economy. While the Treasury has recognized that debt loads are “unsustainable” if they get too high, the Biden White House hasn’t made any visible efforts to reduce the deficit and the debt, instead rolling out more than $6 trillion in spending plans, okaying a rise in defense spending, and sending over $100 billion in weapons and economic assistance to Ukraine to fight NATO’s proxy war against Russia. The debt and the deficit continue to grow, while the Fed’s string of interest rate hikes has made borrowing more expensive and interest payments higher.
How long Washington will be able to sustain a monetary policy that seems to consist of endlessly racking up debts is anyone’s guess. However, some economists fear the federal government has already entered a “doom spiral” of debt from which it may not be possible to escape.
“Why do people willingly participate? It’s because they don’t realize it’s a Ponzi scheme. They think they’re going to be paid back. When they realize they’re going to be paid back in monopoly money, they’re not going to want to lend. In fact, they’re not going to want to hold on to these Treasuries and the only buyer is going to be the Federal Reserve. And that’s when the printing press is going to overdrive and the dollar is going to fall through the floor,” Peter Schiff, one of the few US economists who predicted the 2008 collapse, warned in a podcast in February.
Is he correct this time around? We may soon find out.
