HomeUS Federal Deficit Approaches 20% of Nominal GDP

US Federal Deficit Approaches 20% of Nominal GDP

The US federal deficit has reached its second-highest level in history, with only World War II being worse

The US March deficit numbers were released three days ago. Unsurprisingly, they showed an increasingly large deficit that comes close to 20% of nominal GDP, thus fulfilling this prediction:

This is indicative of how America has dealt with the Covid-19 pandemic by delivering financial assistance directly to businesses and households. Stimulus checks reached American households twice during the pandemic, and additional money was deployed to fund vaccine distribution.

But where did America find the money to pay for everything?

The US Treasury Rides to the Rescue

As the well-known saying goes, desperate times call for desperate measures, and the Covid-19 pandemic left governments with no other choice than to spend, spend, spend. When it came to spending, the US government was characteristically direct while the Europeans were characteristically cautious.

In 2020, the euro rallied across the board (rising from 1.06 to 1.20) on the back of joint debt issuance backed by the European Commission. Suddenly, Eurobonds were not impossible anymore. But the money has to be borrowed first and disbursed in due course. In sharp contrast, America acted immediately, which will be reflected in market prices.

The US Treasury issued new debt in a frenzy as the pandemic unfolded. It also built the Fed’s Treasury General Account to more than $1.5 trillion, which means that the much-needed money was already borrowed when it needed to be spent.

It became obvious that currency traders able to calculate the difference between how much the Fed buys in assets, and how much the Treasury issues in debt, could value the dollar better. The dollar declined during the pandemic, and only briefly corrected in the last two months.

What’s the Way Out?

The USA’s current deficit is the second-highest in history, with a larger deficit only occurring during World War II. Since American taxes nowadays account for 50% of spending, the Treasury has no other choice but to issue more debt.

The only way out of this circle is for the American economy to grow at a much higher pace in the future. The new long-term infrastructure and green projects announced recently may be just what America needs to shrink its deficit. And for the pandemic to end soon, of course.

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