The United States is about to significantly increase its debt. This is a good thing.
“It doesn’t permanently increase public spending,” said Louise Sheiner, senior researcher at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “It’s a unique thing. A big one-time thing, but it increases the debt level and doesn’t affect the debt trajectory in any way afterwards, making it less difficult in the grand scheme of things.
Simple calculations show why. If the national debt were to increase by $ 2 trillion from forecast and the government paid it off by issuing 30-year bonds at current rates, the cost of servicing the debt would be around $ 29 billion per year. , an insignificant amount in a $ 20 trillion savings. And unlike a private borrower, the government never needs to repay its debt; theoretically, debt can remain on the books indefinitely as long as the cost of interest payments is manageable, which in turn depends on economic growth.
“We certainly expect debt accumulation much faster than before,” said Moody’s analyst Mr. Foster. “But if this is effective, it will cushion the blow to growth, and the economy will pick up more quickly, and that would have positive spillover effects in terms of debt dynamics,” meaning that the result of a successful stimulus would be a larger economy and therefore a lower debt-to-GDP ratio than if the government had not acted.
“At this point, the government cannot care about the deficits,” he said. “The downside risk of an inadequate response is much more serious. “
“The level of public debt will have increased,” said Mario Draghi, former president of the European Central Bank. in a test published this week in the Financial Times. “But the alternative – a permanent destruction of productive capacity and therefore of the tax base – would be much more damaging to the economy and possibly to government credit.”
The $ 800 billion fiscal stimulus that the Obama administration enacted from early 2009 has been widely criticized for increasing the deficit. But the budget deficit peaked that year and narrowed in subsequent years as the US economy recovered.
The Fed may one day need to raise interest rates and sell its holdings of Treasuries to avoid inflation. But that would most likely occur at a time when the economy had returned to its pre-coronavirus trajectory and was experiencing higher levels of inflation than have been evident over the past decade.