The Biden administration launches the biggest fiscal expansion ever, injecting $ 1.9 trillion into the US economy. This amount is equivalent to about 9% of gross domestic product. The price sought is economic growth of 6.4% in 2021 and 3.5% in 2022. The unemployment rate will be halved, from 8.1% to 4.2% if the fiscal expansion takes place. as expected. But will he do it?
The impact on federal finances already in dire straits will be devastating. The federal deficit in 2020 was 14.9% of GDP and is expected to be around 10% for 2021 and 4.6% in 2022. Even with relatively optimistic outlook on growth and interest rate levels, it will fluctuate between 3.6% and 5.7% over the next ten years.
In 2019, the United States accounted for 41% of the global savings deficit. But at the time, the current account deficit of the balance of payments was 2.2%. With a forecast of 3.9%, an extrapolation points to 60 to 70% in 2021.
The United States is sucking capital from the rest of the world to solve its domestic economic problems. Other debtors, especially developing countries, do not have much choice. But to see the savings transferred to the United States despite the damage done to their own economy. Higher US growth means higher imports, which can help other countries, but mainly industrial and resource-rich countries, leaving weak – less developed – countries in the doldrums. And they are the most likely to fail.
The average inflation targeting policy of the Federal Reserve system, also known as the Fed, indicates that inflation may exceed 2% modestly and temporarily to offset past low inflation. The Fed believes that the 4.2% increase in the Consumer Price Index (CPI) for April 2021 is in line with this policy. The trend is perhaps less sympathetic. Between January and April 2021, average monthly inflation was 2.5% compared to an average monthly figure for 2020 of 1.2%. The market is disrupted by the Fed’s inaction. Over the past year, the ten-year Treasury rate fell from 0.58% to 1.58%.
If the trend in the CPI and the 10-year Treasury rate continues, it is doubtful how long the Fed will be able to hold the horses. The US economy could resist rising interest rates, at least in the short term.
But many countries, especially those that are already vulnerable, may not be. As the money cannot be in two places at the same time, developing countries facing a heavy debt burden will not get the money they need to keep the wolf out. The result may well be that the released birds come home to roost.
The external debt of developing countries is now around a third of GDP and is expected to increase further. One would expect, or rather hope, that since the global financial crisis of 2008-09, deleveraging has taken place, but nothing of the sort has been done. Debt has more than doubled as a percentage of GDP. The composition of creditors has deteriorated. Ten years ago, about half of the debt was owed to private creditors. Today, around two-thirds of the debt is owed to private creditors.
If the national debtors are in trouble, then the government will have to come to the rescue but has no money. The door to global financial institutions will not be opened because governments themselves are in debt.
Most of the creditors are private financial institutions all over the world, including the United States. The major faults will have repercussions on their balance sheets already strained by the national economy. The result could be a recovery from 2008-09. The government is being asked to act as the lender of last resort (too big to fall, remember that sentence!), But this time the US government is overburdened with debt.
The result may well be that the United States has to come to terms with the failure of the big financial institutions that are setting the ball rolling.
In 2008-2009, Chinese growth saved the world from a sharp drop in GDP. This time, it is not obvious. The Chinese economy is still relatively strong, but one wonders how strong it is in the face of a major crisis. China’s total debt is estimated to be the same size measured relative to GDP as that of the United States, but the main difference is that China has a comfortable current account surplus.
Some observers believe that the German surplus (the largest in the world) was a destabilizing factor pushing Germany into aid. The Germans will say that by accepting the relaunch of the EU, they have done their part. Few or no other countries have deep pockets to help even if they wanted to help and there is every indication that they are not. Ranked by absolute size in billions of US dollars, the other major surplus countries are: Japan 176, China 102, Netherlands 90, Russia 64, Singapore 53, according to 2019 data.
The United States might be lucky. Things can turn out in a way that helps the country get through a rough patch, but there’s a good chance it will turn out badly. The numbers don’t lie and they point in the wrong direction.
Joergen Oerstroem Moeller is a former State Secretary of the Royal Danish Foreign Ministry and the author of The transformation of Asia: from economic globalization to regionalization, ISEAS, Singapore 2019 and The Veil of Circumstance: Technology, Values, Dehumanization and the Future of Economics and Politics, ISEAS, Singapore, 2016.