The Legacy of Coronavirus – Wall Street Journal
Andy’s Notes: This is where the Keynesian leanings of policymakers and economists are going to finish off an already weakened currency and the economy that uses it. The question used to be ‘Should we borrow to stimulate?’ Now the question is ‘How much will be enough?’. This progression has occurred over the last dozen years and it’s a global one. Debt is the mighty elixir for all that ails. In a completely unironic twist, the lack of economic ‘wiggle room’ people, businesses, and governments have for dealing with a crisis has been largely caused by a reckless accumulation of debt. Now the solution being offered is even more debt. The world has, in fact, gone insane. Ladies and Gentlemen of the jury, I rest my case.
Sutton
The full impact of the coronavirus pandemic may take years to play out. But one outcome is already clear: Government, businesses and some households will be loaded with mountains of additional debt.
The federal government budget deficit is on track to reach a record $3.6 trillion in the fiscal year ending Sept. 30, and $2.4 trillion the year after that, according to Goldman Sachs estimates. Businesses are drawing down bank credit lines and tapping bond markets. Preliminary signs are emerging that some households are turning to credit for funds, too.
The debt surge is set to shape how governments and the private sector function long after the virus is tamed. Among other things, it could be a weight on the expansion that follows.
Many economists believe low interest rates will help the nation manage the soaring debt load. At the same time, they say high levels of private sector debt could lead to a period of thrift, slowing the recovery if businesses and individuals try to rebuild their savings by holding back on investment and spending.
“People and firms and government are facing a negative shock, and the classic textbook prescription for a temporary shock is to do some borrowing to smooth that out,” says Alan Taylor, an economist and historian at the University of California Davis, who has studied the economic effects of pandemics going back to the Black Death of the 14th century.
Borrowing now amounts to a transfer of economic activity from the future to the present. The payback comes later. “You do have something to worry about in terms of the recovery path,” Mr. Taylor said. Overall U.S. debt as a share of GDP has been rising since the 1980s. Since the 2007-09 crisis, stimulus plans pushed federal debt to post-World War II levels, while household debt shrank as people paid off commitments.
Past crises and buildups in U.S. government debt led to changes in the tax code and sharp fluctuations in inflation. In the private sector, debt loads could become a dividing line between firms that fail and those that emerge more dominant in their industries.
Because states run balanced budgets to avoid large debt, they are likely to dip into rainy day funds in the weeks ahead and could turn quickly to cost cutting to keep their budgets in line in a downturn, squeezing the economy.
Moody’s Analytics sees $90 billion to $125 billion of such cuts or tax increases coming and says the hits will be unevenly spread around the country. New York, Michigan, West Virginia, Louisiana, Missouri, Wyoming and North Dakota are especially vulnerable, it said.
The Federal Reserve, the nation’s central bank, will play the critical role of navigating the nation through the rising tides of debt. It sways the cost of debt service, whether inflation emerges and whether banks and other financial institutions can bear the burden of lending that the nation demands.
So far the Fed is getting high marks from President Trump and many economists and investors for moving quickly to make credit widely available, though it faces challenges and uncertainties deciding how far to extend itself and when and how to pull back. On Thursday, it announced more programs to support $2.3 trillion in lending.
During and after the 2007-09 financial crisis, the Fed expanded its own portfolio of securities and other holdings from less than $800 billion to $4.5 trillion. The Fed unwound some of that as the expansion took hold. Now, in the initial stages of the coronavirus crisis, it has stretched its holdings from $3.8 trillion last September to $5.8 trillion as of April 1, and is on track to increase them by trillions more in the months ahead.
“Had the Fed not come in these past few weeks, we would have had a combination of the Great Depression and the 2008 financial crisis,” said Mohamed El-Erian, chief economic adviser at Allianz, the Munich-based financial firm.
The U.S. government currently has $17.9 trillion in debt held by private investors and other governments—the amount it has borrowed from others to fund its annual budget deficits. That works out to 89% of U.S. gross domestic product, the highest since 1947. Before the coronavirus crisis, debt and deficits were pushed higher by ramped up government spending on military and other programs and tax cuts enacted in 2017.
Government borrowing will soar in the months ahead due to the $2 trillion economic rescue program, higher spending on programs like unemployment insurance and an expected fall in tax revenues amid lower incomes and corporate profits.
Mr. Trump is pushing for an additional Washington stimulus program focused on infrastructure spending. House Speaker Nancy Pelosi said another round of stimulus could exceed $1 trillion. That could include an expansion of small business loans and grants by another $250 billion.