Any way we look at it, the U.S. faces a dire and desperate situation.
The annualized rate of growth for real gross domestic product in the second quarter of 2020 is minus 32.9%, meaning that if we continue as we are now, our economy will shrink by almost 33% in 2020. If we look at the percentage change in real GDP from a year ago, U.S. numbers shrank by 9.5% in the second quarter of 2020 compared to the second quarter of 2019.
The quarantine from March to May drastically decreased economic activity. Even as quarantine restrictions have been lifted, we are not seeing the economy bounce back nor is it expected to as long as we see COVID-19 infections and deaths increasing across the U.S. and the number of hot spots increasing by the week.
So, decreased household consumption continues since the economy cannot fully function without the pandemic under control. Unemployment will continue to be high. The rate in June was 11.1%, and the number of jobless claims has continued to increase each week by more than 1 million since the end of March.
The number of people unemployed is about 18 million, and the economy does not have 18 million unfilled jobs (or anything close to it) because there is not enough consumer demand to justify hiring more people. As of May, in the latest data available from the Bureau of Labor Statistics, there were only 5.4 million unfilled jobs.
As more people become unemployed and as more people are worried about losing their jobs, consumers will continue to pull back on spending, which means fewer final goods and services need to be produced, resulting in increased unemployment and a further deepening downward economic spiral.
Since the consumer is unable or unwilling to spend, this is where the government can play a positive role through expansionary fiscal policy which, unfortunately, is going to be fueled further by debt that can be categorized as survival debt.
The stimulus payments in April helped to decrease the unemployment rate from 14.7% to 13.3% in May.
Expansionary fiscal policy can take the form of tax cuts, increased government spending and increased transfer payments - with the largest positive impact on the economy coming from increased government spending.
If businesses are permitted to close and if people are unable to find jobs, our economy will shrink, causing further hardship.
The potential for extremely high levels of homelessness is a real possibility as more people fall delinquent on their mortgages and rent.
According to the Household Pulse Survey done by the U.S. Census Bureau, 26.5% of people have not paid their last month's rent or mortgage or are fearful they cannot meet next month's rent or mortgage payment.
Aside from being the moral and humane thing to do, it is economically cheaper to keep people in their homes and apartments than to try to get people back into homes once they have become homeless. In addition, we need to have a workforce in place and ready to go once the pandemic is under control, which will not be possible if we have a large homelessness problem.
Government debt can fall into three categories: 1) investment debt such as treasury bonds issued for infrastructure projects, which helps to grow the economy; 2) regrettable, i.e. bad, debt issued to fund tax cuts or fund government spending that does not help much in creating jobs or significantly increasing real GDP; and 3) survival debt such as the debt issued to keep the economy afloat during a recession.
If we are going to go into debt as a nation, then we can combine survival debt and investment debt to make the most of a bad situation.
The federal government debt is $26.5 trillion, and nominal GDP is $19.5 trillion (as of June). Our federal debt to nominal GDP ratio is about 136% in the second quarter of 2020; it did not get this high overnight. In the first quarter, the debt to nominal GDP was about 108%. It had increased by 5% in the past three years despite low inflation and unemployment.
Part of this huge increase in ratio is attributable to the increased fiscal spending in the second quarter of 2020 by $3 trillion and decreased nominal GDP in the same period of 34.3%, using the annualized rate of growth. Without the expansionary fiscal stimulus, the decline in nominal and real GDP would have been much larger.
If the economy is permitted to shrink even more, paying back the debt is going to be a great deal harder and the recession will continue long after the pandemic has passed. If this survival debt can be turned into investment debt by revitalizing our aging infrastructure, we can create more jobs, which means consumers will be able to buy more, thereby creating more jobs to fulfill consumer demand.
The two things the U.S. has in its favor are 1) interest rates on treasury bills and treasury bonds are incredibly low, and 2) the vast majority of U.S. government debt is held in the U.S., which means that much of the interest paid on U.S. debt stays in the U.S.
About $6 trillion of government debt is intragovernmental debt, meaning U.S. government programs and trust funds such as Social Security, military retirement and health care, civil service retirement and disability, and Medicare hold 23% of U.S. debt.
As of July 2020, the Federal Reserve Board held $4.3 trillion in U.S. Treasury Securities, 16% of U.S. debt. As of May 2020, the latest available data, foreigners owned $6.9 trillion of U.S. debt. This is 26% of U.S. debt, with Japan being the largest holder, owning $1.3 trillion in U.S. government securities.
All remaining U.S. debt is held by U.S. private investors and state and local governments. So, about 74% of all government debt interest payments go to U.S. entities of one form or another.
As of July 31, the interest on a one-month treasury bill is 0.09%, the interest on a 10-year treasury bond is 0.55%, and the interest on a 30-year treasury bond is 1.20%. So, if the government borrows using 30-year treasury bonds, the government will pay the holder of the bond $12 a year for each bond with a face value of $1,000 for the next 30 years.
Given the following three factors: 1) more than 70% of the interest paid on U.S. government debt stays within the U.S.; 2) the interest rate on a 30-year treasury bond is 1.20%, which is a little higher than the year-over-year core inflation rate of 0.90%; and 3) the consumer is unwilling or unable to spend to keep the economy afloat, the government needs to step in to help stimulate the economy through expansionary fiscal policy to get us through this pandemic.
So, our choice is to go into further government debt to save our economy, which can be turned into revitalizing our economy, or watch as our economy shrinks by 33% or possibly more. Going into any form of debt is stressful. It weighs on us and yet, sometimes it is unavoidable.
This is one of those unavoidable times. It is about survival - plain and simple.