The crack of the budget: US government debt for the first time reached $ 25 trillion

The national debt of the United States exceeded $ 25 trillion - for the first time in the history of observations. Such data are provided by the US Treasury Department.

From January to early May 2020, the figure increased by almost $ 2 trillion, although previously the debt of the US government grew by no more than $ 1.5 trillion per year. Moreover, by the beginning of 2021, the value may additionally grow and rise above the level of $ 28 trillion. This was told in an interview with RT by an expert at the Academy of Finance and Investment Management Gennady Nikolaev.

Analysts attribute the sharp increase in the debt burden to the growing spending of the American authorities on eliminating the consequences of the COVID-19 pandemic. To date, the United States remains the leader in the number of coronavirus infected. At the same time, the introduced quarantine restrictions provoked a massive reduction in trade and passenger traffic, as well as the closure of enterprises.

“The sharp increase in debt is primarily caused by the actions of the government and Congress in response to the negative impact of the coronavirus pandemic. To support the economy, the US authorities have already adopted four separate legislative acts worth about $ 2.4 trillion, ”Albert Koroev, stock market expert at BCS Broker, said in an interview with RT.

According to the Bureau of Economic Analysis of the United States Department of Commerce, as a result of the spread of infection in the first quarter of 2020, the country's GDP fell by 4.8% in annual terms. The economic decline that has occurred has become the largest since 2008. Moreover, as the situation with coronavirus worsens already in the second quarter, US GDP risks falling by 40% in annual terms. The corresponding calculations were made by the specialists of the budget management of the US Congress.

A significant economic downturn and the forced shutdown of a number of small and large enterprises caused a wave of layoffs. According to the US Department of Labor, since late March, the number of applications for unemployment benefits in the country has grown by more than 30 million.

The increase in the number of unemployed is accompanied by an increase in the debt burden of the population. According to the Federal Reserve Bank of New York, in the I quarter of 2020, total household debt increased by $ 155 billion and reached a record $ 14.3 trillion. Moreover, as expected, in the near future the indicator will continue to increase.

“Now a full-fledged insolvency crisis may arise due to quarantine, and the US Federal Reserve will have to urgently redeem not only bad debts of companies, but also the population. If quarantine lasts until mid-summer, then 30% of American families will begin to have difficulty paying mortgages, and this is fraught with both an increase in insolvency as a whole and a drop in consumer activity, ”Gennady Nikolaev explained.

According to RT analysts surveyed, government support measures for the economy should mitigate the impact of COVID-19 on the country's population and business. At the same time, an increase in cash spending risks turning into a massive increase in the country's budget deficit. According to CBO, in 2020, US treasury spending may exceed revenues by $ 3.7 trillion, or 18% of GDP. The last time a similar value could be observed during the Second World War.

“On the one hand, the economic decline sharply reduced budget revenues. On the other hand, the state treasury has to unprecedentedly increase spending precisely to support the economy. This led to an enormous increase in the budget deficit, which must be covered in the traditional way for the USA - by increasing the public debt, ”TeleTrade chief analyst Mark Goikhman explained in an interview with RT.

Credit loop

Note that to cover the budget deficit, the US Treasury Department issues special treasury bonds (treasuries). American and foreign investors buy securities and receive a steady income on them, essentially lending their money to the American economy. These funds are used to cover the budget deficit, but in the long run, the growth of public debt only increases the burden on the country's budget.

According to the latest data from the US Treasury, in February 2020, about one third ($ 7 trillion) of US total debt came from treasury securities purchased by foreigners. Moreover, in the coming months, the financial authorities of the country plan to significantly increase the corresponding indicator.

“The bulk of borrowing came in April - the height of the pandemic. In general, according to statements by the US Treasury, in the second quarter, the agency plans to raise an additional $ 3 trillion, and in the third quarter - another $ 677 billion, ”said Mark Goikhman.

• © Kevin Lamarque / Reuters

According to RT, the head of the laboratory of the Institute of Applied Economic Research, RANEPA, Alexander Abramov, in order to reduce the negative impact of the epidemic on the economy, the Federal Reserve of the States announced an unprecedented expansion of the quantitative easing program in late March. The regulator began to print dollars and in an unlimited amount independently buy Treasuries in the stock market. 

Since the beginning of spring, the volume of treasury bonds on the Fed's balance sheet has grown from $ 4.2 trillion to $ 6.6 trillion. According to Alexander Abramov, by the end of the year, the corresponding amount could reach $ 11 trillion.

The Fed’s policy of issuing new dollars and redeeming government bonds should lead to an increase in the money supply in the economy and help increase GDP growth. At the same time, as Abramov explained, the actions of the Federal Reserve could result in a sharp acceleration of inflation and a weakening dollar in the long run.

“It is noteworthy that since the beginning of April, many currencies of emerging markets, for example, the ruble and the Mexican peso, have already begun to gradually strengthen against the dollar. In the current conditions, the weakening of the American currency becomes inevitable, and the growth of public debt and budget deficit will only contribute to this in the future, ”said Abramov.

Moreover, according to experts, against the backdrop of a record increase in unemployment and a budget deficit, an increase in the debt burden on the economy may weaken Donald Trump’s position ahead of the election. As Mark Goikhman notes, the previously acting head of the White House has repeatedly blamed his predecessors for the rapid growth of debt and promised to rectify the situation. Nevertheless, under Trump himself, the debt of the US government increased by almost a quarter (by $ 5 trillion).

“Now the public debt is creating enormous pressure on the economy, demanding more new resources for its services and current repayments. Although an extraordinary increase in debt in recent months has been largely forced, on the whole it’s a negative for Trump’s election positions and an extra trump card for criticism from rival Democrats, ”said Goikhman.