By Brian Beaulieu on Apr 20, 2020 11:04:40 AM
It is normal to wonder if recent events might hasten the US economy’s decline into depression. This is especially true considering ITR Economics’ longstanding concerns about untenable deficit spending by the US government and how it is a probable causal factor to the forecasted Depression in the 2030s.
Perhaps it helps to first consider if the federal government can afford the debt. The government can afford the expenditures associated with the CARES Act of 2020, HR 6201, and other stimulus spending in the short term as long it has the capacity to borrow money. It can and likely will continue to borrow money to cover these programs as long as the world believes the US government will repay its debts. This is aided by the fact that the Federal Reserve is rapidly expanding its balance sheet to become one of the primary lenders to the US government. This in effect monetizes the debt and provides a means for the government to “afford” the debt, at least in the short term.
As to how come the newly created debt does not accelerate the 2030 Depression, our contention is that it is not the size of the debt that matters; what matters is the debt remaining under the halo of “full faith and credit” of the US government. We think that when “the world” loses confidence in our ability/commitment to pay back the debt, the depression scenario is set in motion in earnest. Confidence can’t be measured as a dollar value or percentage of GDP, which makes it harder to determine when we have crossed that line.
We are watching the Treasury Bill interest rates. We think a “tell” will be when the T-Bill rates no longer carry an interest rate consistent with the assumption that they are essentially a risk-free investment. We are setting up a model to measure the T-Bill yield against traditional measures of inflation (which would normally mean higher rates anyway) to get a mathematical handle on the otherwise fuzzy notion of “risk free." This will no doubt result in a range of “normal,” and we will be watching for sustained deviation away from the normal.
Based on current T-Bill and 10-year rates, it appears the US government still has the world’s confidence that the debt will be repaid even without the benefit of the model.
Keep in mind that the crisis of confidence may not even come from within the US. China is more heavily indebted than the US. Should the world lose confidence in the world’s second largest economy, it could either bolster our “safe haven” status, at least initially, or bring about the realization that the US position became a lot more unstable by virtue of China’s debt problems. Dominoes fall backward and forward; it is a function of where the external force comes from.