U.S. Government Debt
BY: Margaret Pham
Since the beginning of the economic downturn due to the pandemic, the Federal Reserve has taken a number of measures to curtail damages in financial markets. Nearly two weeks before schools and workplaces shut down, the Federal Reserve slashed their target federal funds rate by 150 basis points and brought interest rates down to near-zero. Furthermore, by promising a program that would buy at least $500 billion in Treasury Securities and $200 Billion in Mortgage-Backed Securities, they opened the door to buy billions more in open-market operations, nearly doubling the securities on their balance-sheet.
To encourage banks to continue to lend, the Federal Reserve further decreased the discount rate to 0.25 percent, lower than it was during the Great Recession. They also extended terms to repay loans from overnight to 90 days, while offering collateral in securities in exchange for a steady flow of cash ready to be loaned. This is called Securities-Based Lending. For consumers, when the Federal Reserve encourages banks to lend through target rates, mortgages for property financing change. Fixed rate mortgages, which are not impacted by Federal rate changes, stay constant. However, people with adjustable rate mortgages will benefit from lower payments. This was seen recently in the U.S. 's roaring housing market, when homes were selling faster than ever and more homeowners were choosing to refinance.
These are just a few of the fiscal measures the Federal Reserve has undertaken since the beginning of March to encourage spending and prevent an economic depression. However, this new surge in government spending (ie: the historic $2.2 trillion CARES Act and $8.3 billion for vaccine research) and federal borrowing has inflated the total national debt to a size unseen since World War II. According to the Congressional Budget Office, by the end of the 2020 fiscal year, the sovereign debt will be larger than the size of the U.S. economy itself. This year’s unprecedented events have shaken the nation. Decade-long forecasts made at the beginning of this fiscal year were shattered. The U.S. deficit, which is the difference between U.S. spending and revenue from taxes and assets, is set to triple from last year, coming in at $3.3 Trillion.
Learning from the last Great Recession, the COVID pandemic has seen a rush to borrow money on Capitol Hill that did not occur at the end of 2010. However, the situation presents itself differently in 2020 when the total government debt is quickly reaching 98% of the entire U.S. economy. The last time where federal debt surpassed nominal GDP was back in 1946, at the end of World War II.
Aggressive borrowing and spending in hopes of spurring economic activity may exhaust certain funds such as the Social Security Trust Fund. The U.S. is spending one year ahead of projections. Similarly, Medicare is two years ahead of spending forecasts, and is on route to run out of funds in 2024. All of these factors have put lawmakers into a bind to juggle the sovereign debt, the national deficit, the Social Security Trust Fund, the ongoing recession, and the wellbeing of their constituents. When millions are unemployed and businesses are permanently closing across the nation, what do we prioritize when the pandemic shows no signs of slowing? There is no question whether the deficit is a problem that the U.S. must attempt to resolve. However, it must be asked, is it the right time to do so? The climate of unemployment amidst a public health emergency must be grappled with first. Without any signs of another national stimulus bill, cities like Los Angeles are struggling as they are faced with the potential loss of millions of tenants, who are facing eviction. Los Angeles ignored the strain on their balance sheet and committed $10 million to extend eviction protections for another five months.
*All arguments made and viewpoints expressed within Youth In Politics and its nominal entities do not necessarily reflect the views of the writers or the organization as a whole.
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