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Over the past decade, international economists and rating agencies have blamed Italy’s massive indebtedness for making the nation the most worrying case among major European economies. This burden is so heavy that Italy can only encourage investors to buy its bonds by paying rates 2.5% higher than those of a fiscally prudent Germany. Its economy grows at such a slow pace in good times – a paltry 0.8% on average from 2014 to 2019 – that Italy cannot generate tax revenue gains large enough to match the trajectory of rising spending. government, which means its deficits and borrowing are doomed to continue growing unless they adopt a tough austerity program to cut spending.
Experts have long feared that the weight of this ever-growing mountain of euros is so great that only a bailout for Greece can prevent Italy from getting out of the common currency. Meanwhile, you can see the effects of the Italian public finance crisis in cities across the country: chronic underinvestment has led to an escalation in youth unemployment. Those caught up in the failure of the country’s economic policies are known as the lost generation– “the lost generation”.
America is unlikely to face the kind of crisis that threatens Italy: a sudden perception that reckless spending and crippling debt makes the nation a serious credit risk, prompting foreign creditors to dump our money. goods of treasure. This leak would cause rates to rise, forcing our government to pay significantly more interest on the trillions of bonds that renew each year, and this extra spending would push up already dangerous deficits. As the COVID-19 crisis demonstrated, the United States has incredible flexibility to borrow heavily in perilous times, as foreign investors revere the dollar as the world’s safest haven, confident that the greenback will hold its value against other currencies in the world. These creditors are also hoping that US prices will remain stable, so that the surge in inflation will not hurt the value of their Treasuries.
But now, the spending explosion designed to tackle the ravages of the pandemic is on track to add alarmingly to our federal burden and close to Italy’s proportions. “Many economists say that the spending that brings us to Italy’s levels is good because interest rates will stay extremely low forever,” says Brian Riedl, budget specialist at the conservative Manhattan Institute. “But the United States is taking a gigantic risk by piling up all this debt. And even optimistic assumptions about the direction of rates mean that interest will overwhelm the budget, not next year, but decades to come.
Until the presidential election and the double second round in Georgia, it was not clear whether spending and borrowing would slow down or follow the betting pattern. new stimulus before worrying about skyrocketing debt and deficits. But President-elect Biden’s election platform, and his pledge to hand over $ 2,000 checks to most Americans, which is now apparently backed by both houses of Congress, points to another explosion in 2021. As of late Fiscal 2019 (ended September 30), the United States’ public debt stood at $ 16.8 trillion, or 79.2% of GDP. But in 2020, the United States posted a staggering deficit of over $ 3 trillion which, by the end of fiscal 2020, inflated the federal burden to $ 20.3 trillion and raised the debt-to-debt ratio. GDP, the measure of what we owe versus what we earn. , to 97%, a jump of almost 18 points.
Before President Trump signed the new $ 900 billion stimulus package, the Congressional Budget Office estimated the 2021 deficit to be $ 1.8 trillion. Riedl predicts that the Trump measure, plus the additional aid promised by Biden, will push the 2021 deficit to at least $ 3 trillion. So in just two years, US debt will drop from $ 16.8 trillion to a low of $ 23.3 trillion, a jump of $ 6.5 trillion or nearly 40% in just 24 months.
Where does that put the United States compared to Italy and other notorious debtors? Any international comparisons this author has found are not based on “public debt,” the measure cited above, but on total government borrowing. The difference is that the former does not include the money a state owes itself – like our borrowings from social security trust funds – while the latter includes intergovernmental loans. Yet the full debt figures provide a useful measure of America’s rise through the ranks of the most indebted countries.
Using all of the national debt as a measure, the United States in 2020 had borrowing to GDP of about 134% according to Commodity.com, whose website shows current levels of debt and GDP for a number of countries. That’s a jump of less than 109% in 2019. Right now, Italy stands at 152%. Thus, the American debt as a proportion of the national income needed to pay it is now almost 90% as high as that of the sick man in Europe. In 2020, the United States ranked third in terms of debt / GDP among the 21 countries with GDPs over $ 500 billion. Besides Italy, the only country with the highest burden was Japan, at 258%. At 134%, America’s load at the end of last year exceeded that of South Korea (44%), China (48.5% in 2020), India (52%) , the United Kingdom (90%), Brazil (97%) and France (106%).
We can assume that the projected additional deficit of over $ 3 trillion will increase our debt-to-GDP ratio next year to around 150%. Of course, it is likely that Italy will also significantly increase its spending to fight a deep recession, thus maintaining its lead over the United States. Yet we are getting closer.
Deficit doves vs falcons
Is a record that increasingly resembles that of Italy really a threat? Not according to economists such as Larry Summers, the former Treasury secretary, and Jason Furman, a senior adviser to President Obama, who say America needs a lot more stimulus spending and can easily afford it because interest rates will remain extremely low for many years to come, in part due to a glut of global savings that will cause foreigners to buy our Treasuries at favorable rates in the future. But as Riedl points out, taking on more than $ 23 trillion in debt by the end of next year comes with big risks. “The CBO predicts that the yield on 10-year Treasuries will drop from just over 1% today to 4.4% over the next 30 years,” he says. “At this point, interest would absorb half of all income. We could get there a lot faster, because accumulating so much debt could cause borrowers to demand higher yields to offset the growing danger of holding US debt. It takes a lot of pride to risk your creditworthiness by assuming that mortgage rates stay abnormally low forever. “
Taking big leverage, be it a nation or a household, is always a gamble. Granted, the United States is a much stronger economy and can handle a lot more debt than Japan, Greece or Italy. But going in their direction limits our margin of error in countering another crisis like COVID-19, or even another financial hurricane. If disaster happens again, we will place our fate in the hands of our foreign creditors, led by Japan and China.
How much confidence they will still have in the world’s reserve currency is a guess.
More to read absolutely financial cover of Fortune:
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