Critics repeatedly said this circular form of fiscal finance — in which one arm of the government, the central bank, basically creates the money needed to fund the arm of government that taxes and spends — would inevitably lead to a spiral of inflation, a spike in interest rates or a loss of confidence in the currencies. It didn’t.
“This is a 40-year pattern,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a proponent of what’s often called Modern Monetary Theory. That view holds that countries that control their own currencies have far more leeway to run large deficits than traditionally thought. “The whole premise that deficits drive up interest rates, it’s just wrong,” she said.
At the end of last year, the United States was about $17 trillion in debt — roughly 80 percent of the gross domestic product. In January, government analysts predicted that debt would approach 100 percent of the G.D.P. around 2030. But by the end of June, the debt stood at $20.53 trillion, or roughly 106 percent of G.D.P., which shrank amid widespread stay-at-home orders. (These numbers don’t count trillions more the government owes itself in bonds held by the Social Security and Medicare trust funds.)
That more than 25 percentage-point surge would represent the largest annual leap in American indebtedness since Alexander Hamilton founded the nation’s credit in the 1790s, outpacing even the debt growth at the peak of World War II, according to data from the Congressional Budget Office.
And it’s not over yet. The Treasury is expected to borrow over $1 trillion more through the end of the year — and that’s without counting another stimulus package. Republicans in Congress have pushed for a $1 trillion package, while Democrats have already passed their own plan with a price tag of more than $3 trillion.
“What’s very clear is that the U.S. economy has some room,” said Rick Rieder, global chief investment officer of fixed income at BlackRock, which manages over $7 trillion in investments for clients, including more than $2 trillion in bonds. “I would argue that we still have room now for another fiscal package.”
Talks on such a package are currently stalled, with the surging levels of debt often cited by Republicans lawmakers as a reason to oppose further fiscal action. But even the current situation would have been unthinkable not long ago.