fiscal crisis

11 May 2020

The U.S. is becoming the king of debt with fiscal crisis

President Donald Trump is living up to his self-given nickname King of Debt. On his watch, the United States spent the last years borrowing aggressively. During the good times, and now in the bad times. Instead of whittling down the federal deficit when the economy was strong, Trump directed the federal government to pile on even more debt. All this in order to pay for massive tax cuts and spending surges. That meant that the United States entered this fiscal crisis in rough financial shape. 

Now, the national debt is exploding because Washington has to rescue the U.S. economy from its greatest shock ever. The Treasury Department said this week it will borrow US$3 trillion this quarter alone. That’s nearly six times the previous record, which was set in 2008.

fiscal crisis
President Donald Trump is living up to his self-given nickname King of Debt. However, the United States entered this fiscal crisis in rough financial shape. (Source: Chatham House)

What you must know about the fiscal crisis in the US

Economists agree that the United States must continue to rack up debt to prevent a full-blown depression. Otherwise, there won’t be much of an economy left to repay the debt once the health crisis is over. Of course, there will be long-term consequences for the mountain of debt Washington is racking up. Eventually, it will mean higher interest rates, hotter inflation, and likely higher taxes.

But for now, the focus is on keeping American businesses and households afloat. In March, Congress passed a US$2.3 trillion stimulus package, the largest in U.S. history. Half a trillion dollars of forgivable loans benefited small businesses. Direct payments were made to low- and middle-income families. All of this will add yet more debt to the pile of this fiscal crisis. But there’s no other viable option to stave off the further crisis.

More on the fiscal crisis in the US

The fiscal stimulus and resulting explosion of the deficit is an absolute necessity to combat the devastating impact of the economic shutdown and to avoid a second depression.

Markets aren’t freaking out about U.S. debt for a few reasons. First, this spending is temporary and emergency in nature. Second, the U.S. dollar remains the preeminent international reserve currency and the US Treasury market is the deepest and largest in the world. Those are huge advantages that keep demand strong for U.S. debt. Third, it’s extremely cheap to borrow right now. The Federal Reserve slashed interest rates to near-zero.

One risk is that a surprisingly strong rebound in the U.S. economy forces the Fed to rapidly reverse course. If the economy comes back too hot, then you could have inflation, higher interest rates – and that could lead to a fiscal crisis of which would translate to slower economic growth due to debt.