In January, the Congressional Budget Office forecast that total U.S. government debt would hit 100% of GDP around 2030. At that point U.S. debt stood at about $17 trillion or roughly 80% of GDP.
So much for that forecast.
As of the end of June, U.S. government debt had hit $20.53 trillion or 106% of GDP.
The 25 percentage point increase is a result of the coronavirus pandemic shrinking the size of the U.S. economy and a big increase in government spending on coronavirus rescue and stimulus. And it’s the biggest one year increase in government debt ever–even bigger than the growth in the debt at the peak of World War II.
(There are lots of ways to measure the size of U.S. government debt. The Congressional Budget Office figure does not include debt the government owes itself in the form of Treasury bonds held by the Social Security and Medicare trust funds.)
Used to be that economists shuddered at the idea of debt reaching 100% of GDP. It was supposed to lead to increases in interest rates, and a surge of inflation. Obviously neither of those has happened yet. Debt levels this high were also supposed to reduce the rate of economic growth. Given other things that have hit the economy, it’s hard to tell if higher debt levels have reduced growth below trend.
Now economists say that countries can sustain much higher levels of debt without triggering interest rate increases or higher inflation, especially when much of the debt is being purchased by the country’s own central bank. The Federal Reserve, for example, has increased its portfolio o U.S. Treasures by $1.8 trillion since March, effectively printing the money it used to make those purchases.
Perhaps the old view was too conservative. Or maybe the new argument is an attempt to rationalize economic facts on the ground the no one in Washington is inclined to change.
Two things are true, if seems to me. First, the current levels of debt don’t leave much room for dealing with an economic “accident.” And, second, if these debt levels should trigger higher rates of interest and inflation, the turn is going to resemble a tidal wave–but with more duration.
Current buying of gold is a reasonable hedge, in my opinion, against the possibility that the “it doesn’t matter yet” school is wrong.