National debt and coronavirus

The national deficit for fiscal year 2020 (which ends on September 30, 2020) may be as high as 4 trillion dollars. Note this is the deficit for only one year, from October 1, 2019 to September 30, 2020. This will include an extra 3 trillion higher due to the Coronavirus (due to increased spending AND lower tax revenue which many people do not think about). The total national debt for fiscal year 2020 may end at 29 trillion dollars or higher. Where does it end? Who is buying this debt? How will the countries debt continue to “roll” over and how much interest are we paying? The amount is incredible.

While COVID first started to hit the US as early as January, and while our political leaders ignored it and/or said it will “magically disappear in April”, of course that was not reality. The reality is, due to many factors such as lack of political and corporate leadership and Americans inability to make even small sacrifices such as to wear a mask or provide any society value, the economy was hit hard in March. Read more on people losing jobs due to COVID.

To respond to COVID and the economic slowdown that was caused by the countries inability to be proactive (like so many other countries did), the federal government started to stimulate the economy to the tune of 2.1 trillion dollars and counting. The federal reserve starting to print money (digitally) and flood the financial system. While I do not want to get too far into the weeds and detail on finances or economics, think about it this way – It may be the simplest interpretation.

The US government stimulated the economy by sending money to businesses, individuals, hospitals, states, etc. But the government does not have any reserve of cash to send as stimulus, so in order to provides this stimulus, the US government in effect borrowed money from its own bank, the federal reserve. So, the governments own central bank is lending money to the government? Crazy I know.

Now the total estimated US debt at the end of this year will be over 29 trillion dollars. Of this, the federal reserve (our own government!) will end up owning about over 10 trillion dollars of it. Not counting all the money that the social security administration has “loaned” to the government from the money you are taxed on social security. It is actually kind of fascinating in that the US government is borrowing money from its own central bank, and its own central bank is loaning money to the US government. And since the central bank digitally can print an unlimited amount of money, where does it end? Will this scheme go on indefinitely?

As if not, if there is ever a time in which the US own central bank stops buying US debt (or following over the debt as it matures), that is where it gets complicated. As that means other people, nations, businesses, investment vehicles (like mutual funds), etc. need to buy 100% of the trillions in US debt. But is the demand there? As those other potential lenders to the US government have limited funds (as they can’t print their own money like the Federal reserve), and then the interest rates on the 29 trillion of debt will increase.

Think about this. The total US debt is going to be $29 trillion. While there are all sorts of different loans (bonds) outstanding (10 year, 30 year, 5 year, short term bonds, etc.) and they all have different interest rates, let’s say that interest rates eventually go up from their historical low rates. What if rates go up to say 3%? That means the US will need to pay $900 billion in interest just to service that debt.

End result of all this US debt

Now I am not smart enough to know how or when this all ends. No one is. But I do think I am smart enough to look at some past examples in history. I am smart enough to say that right now the National Debt does not matter as it continues to get bought (as the country issues more debt/bonds) or as it gets rolled over (as loans/bonds come due new bonds/loans are issued and investors buy them). Can/will the federal reserve continue to print money to buy our own debt? (which could impact inflation and create even more bubbles in assets like housing). Who knows.

But I am smart enough to say there will be a time when debt matters. Change generally happens on a dime. So, it could very well likely go from debt does not matter to debt does matter….in a matter of days or weeks. Look at past history such as the 2007 housing crisis, Italy, Spain, Russia, and many others. They were issuing tons of debt (or banks mortgages for housing) and no one cared, until literally at the flip of a switch everyone cared and those countries and/or industries either collapsed or came close to collapsing due to the debt. There will be a day in the future when debt starts to matter again. And that change of it “not mattering” to it “mattering” could happen very, very quickly, so the country may have little time to respond.

Scary stuff….

By Jon McNamara