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US debt explodes as deflation sets in
The US will take on trillions in debt to subsidise its stimulus packages in the worst blowout since the GFC, with advisers believing deflation will set in for the next 12 months.
US debt explodes as deflation sets in
The US will take on trillions in debt to subsidise its stimulus packages in the worst blowout since the GFC, with advisers believing deflation will set in for the next 12 months.
The US Treasury will borrow $US2.999 trillion in privately held net marketable debt to pay off “new legislation to assist individuals and businesses” as well as changes to tax receipts and an increase in the assumed end-of-June Treasury cash balance.
The US Treasury is also widely expected to add an additional $677 billion during the July–September 2020 quarter.
“At the beginning of 2020, the US economy was in the midst of the longest recovery in American history,” said Assistant Treasury Secretary Michael Faulkender. “Yet towards the latter part of the first quarter, the US economy experienced an exogenous shock from the 2019 novel coronavirus (COVID-19) pandemic and the extraordinary measures taken to respond to it.”
The shutdown from COVID-19 has seen US GDP fall by 4.8 per cent, with the comparative three consecutive quarters of growth in the range of 2.0 to 2.1 per cent.
Freakonomics has predicted that the US economy loses between $US16 billion and $US19 billion a day while the country remains in lockdown.
Unemployment claims have also reached more than $US30 million. But eyes are now returning to the recovery, with some seeing the “bold steps” taken by the Trump administration as enough to offset the shock.
“Although available data suggests that economic growth will slow further in the second quarter of 2020, we are convinced that the downturn will be temporary, given that its cause was not the result of any underlying imbalances in the economy,” Mr Faulkender said.
“The US economy has demonstrated significant resilience in recent years, and although the onset of the pandemic was an exogenous shock, our response to it has been swift and comprehensive, with a view to limiting any future damage to the economy.”
However, Elliot Hentov, head of policy research, EMEA, at State Street Global Advisors, believes investors should not be concerned about a year of deflation.
“While markets are forward-looking, we find the concern over inflation misplaced this early in the downturn,” Mr Hentov said.
“The deflationary forces will be all-powerful for the coming year, even with the optimistic assumptions that COVID-19 treatments improve drastically and there is a ready-made vaccine over this time period.
“Then, once recovery sets in, there will be plenty of standalone hysteresis effects that produce an overhang to the economy and keep demand depressed.
“This macro driver will offset any supply-side inflationary impulses for a considerable amount of time. In short, investors do not need to position for inflation as the relative risks still skew the other way.”
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