The conundrum of the American debt and budget deficit

Raphael Biau

Let us try to imagine one second that the U.S would be in the European Union. With 22.000 billion dollars of national debt and 1.000 billion dollars of budget deficit, the U.S would face a severe infringement process. Following the Maastricht criteria, a state is not allowed to overpass a budget deficit of 3% of its GDP, and a public debt of 60% of its GDP. For the U.S, this number rise in early 2020 at 4,7% for the budget deficit, and more that 100% for the public debt.

The situation is worrying as the U.S must cope with new challenges and issues.

What about the American debt?

The U.S debt has never been so high, it overpasses now the 22.000 billion dollars namely more than 100% of the U.S GDP.

In 2019, foreign investors have sold 128,4 billion of U.S Treasury bills. It is noticeable that a lack of interest is growing among the investors. Is the U.S paying for having strengthened its exports? Therefore, the FED is taking the reins as becoming a moneylender.

Among the investors that have sold these bills, China, which was the first owner of U.S debt, has reduced its stock by 10%. China is no longer the first owner of U.S debt. Indeed, it is the whole investors from Asia that are getting rid of U.S debt. It may be an offensive from Beijing to weaken the U.S government.

Nevertheless, a revival is to be pointed out on the Japanese side, which becomes the first owner of U.S debt. Some other countries have also increased their purchase of U.S bills. Saudi Arabia, for instance, changed its strategies and has passed from 97 billion to 177 billion dollars of U.S bills whereas it has diminished its investments by 30% in 2016. But even with these rises, it is not enough to compensate for the shrink of the major owners of U.S. bills.

Yet, the yield of U.S bills is still the same, with a yield at 10 years around 2%, one of the most profitable bills in the world.

Foreign buying that has been strong until 2012 as 43% of the national debt had been financed by foreign investors is now shrinking. Since 2013, 250 billion of U.S debt have been sold, with only 128,4 billion in 2019. Then, the FED has played a big role in trying to help the government to stabilize the debt, since 2019 the FED has been recovering 700 billion dollars of this deficit.

The large reductions of taxes for the biggest companies in the U.S since Donald have been elected president contribute mainly to the rise of the U.S debt with the interests of the debt and the health expenses. Bloomberg estimates that the tax reductions will cost 1.500 billion dollars in 10 years. The U.S also needs to consider the case of the budget deficit case that drags down the American debt.

If investors no longer want to buy U.S debt, what solutions could be implemented? It is likely that the FED should keep financing the U.S debt as investors are retiring from business, but for how long? During the Davos forum, Donald Trump asked the FED to lower the interest rates to enable the U.S to pay the debt and to refinance it. In the new era of negative rates, the U.S is a scarce country not to have negative rates from its central bank.

The issue of the U.S budget deficit

Thus far, the U.S budget deficit overpasses the 1.000 billion dollars (4,7% of its GDP), which is a 26% rise compared with 2018 even if the American economy is slowly regaining some color. New plans must be implemented to save the U.S economy. While thinking rationally, public expenses must shrink as Steven Mnuchin, Secretary of U.S Treasury said: “There’s no question we need to slow down the rate of growth of government spending because we can’t sustain these deficits growing at these levels”.

However, Donald Trump with the support of the Treasury announced a few weeks ago the plan “Tax 2.0” in order to lighten the burden of taxes on households. Caution is needed about this plan as the presidential campaign is opening. Consequently, the issue of the U.S budget deficit is more than never in the foreground. The argument of Donald Trump to lower the taxes even if it will cost billions of dollars is that the cost of the reduction of taxes would be counterbalanced by the rise of the purchasing power of households.

The U.S population is getting older and poorer, thus the expenses in pensions (+6%), Medicare, or Medicaid (+8%) intensifies. But on the other hand, the military expenses are still dragging the budget down as it is 9% higher than in 2018.

At the same period last year, the budget deficit was 12% lower, 2020 should not be the year of the improvement of the U.S budget deficit.

Unfortunately for the U.S accounts, 2020 begins quite bad, with the guess of a possible recession in the U.S for 2020 and the runaway of the debt owners, 2020 might not be the year for an improvement of both budget deficit and public debt.


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