Joe Biden and Treasury Secretary Janet Yellen are planning a major stimulus package for the US economy. This is not without risk, as it puts a lot of additional pressure on public finances.
We take the debt ratio into account. But now, with interest rates at historic lows, the smartest thing we can do is get big. I think the benefits will far outweigh the costs, especially if we help people who have been struggling for a long time. If we don’t, we risk a prolonged and even deeper recession.
At a Senate hearing on Tuesday, Yellen, now Treasury Secretary, defended the economic plans of Biden, who will be sworn in as President of the United States today. Yellen, who received public acclaim for her leadership of the Central Bank (Federal Reserve) from 2014 to 2018, is no adventurer. She is the right person to help lend credibility to the Biden administration’s economic policies.
Biden announced his intention to launch a major economic attack immediately. He has a $1900 billion plan ready: checks for families, higher unemployment benefits, money for schools, and help for small and medium businesses. There will be a second segment focusing on long-term investments, such as green energy and infrastructure. The stimulus programs are also intended to counteract the great political and social discontent in the United States.
The financial markets are happy with that. The prospect of another major injection into the economy sent Wall Street up.
While Biden is also considering higher taxes on corporations and wealthy Americans to help fund his plans, they will place a heavy burden on public finances, which have been derailed over the past year. The budget deficit tripled to $3,132 billion in 2020 and the debt ratio rose above 100 percent of GDP.
“The challenge for policymakers is to develop a strategy that reconciles long-term fiscal sustainability with support for short-term economic recovery,” Yellen said at a 2010 hearing when the Senate announced his nomination for deputy governor of the United States. The Fed had to ratify. That will now be the challenge for Leylin and Biden.
There are no sharp boundaries that indicate whether or not debt is sustainable. Many economists believe that the government should not hesitate to incur debts for programs to stimulate the economy. Extremely low interest rates mean there is room for that. Interest payments on federal government debt in the United States are about 1.6 percent of GDP. That’s lower than it was in 1980-2000, and it’s completely portable.
That could change if government debt explodes. Under some scenarios, the US government debt could reach 200% of GDP in 2050. And then when interest rates start to rise….
The United States must be able to continue to finance its deficit and debt. This is not a problem at the moment, also because the dollar is still an international reserve currency and investors view US government bonds as a safe haven. To keep it that way, it is important that the United States remains politically and economically stable and has reliable economic policies in place.
Biden’s money to boost the economy should pay off. His plan must be successful.
The money Biden uses to boost the economy should pay off. His plan must be successful. If the economic engine succeeds in acceleration, the debt ratio will automatically decrease. However, there are no guarantees. This is why “acting too big” is such a big gamble.
Because there are risks. The tighter fiscal policy is navigating, the less room there is for new unexpected economic shocks to be absorbed. The monetary policy weapons treasury is almost empty.
In addition, a very expansionary fiscal policy with a budget deficit can exacerbate other economic imbalances. Some of the extra money that American families get will be spent on foreign products. This threatens to overburden the United States with an even larger trade deficit.
The United States has become more dependent on foreign – Chinese? Financiers who buy US government bonds. This could weaken the international political position of the United States.
There is a risk that the massive injection of public money into the economy, along with highly accommodative monetary policy, will awaken the inflation monster. A little inflation doesn’t hurt. But it shouldn’t get out of hand. Because that could push international financiers away from US debt and lead to a dollar crisis.
Biden and Lynn begin an experiment, the outcome of which is uncertain.
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