How Are We Going To Pay For All This?

The largest federal budget deficit since World War II came back in 2009, as slower growth and increased government spending during the subprime-mortgage financial panic pushed the deficit to 9.8% of GDP. This year's the budget deficit will, quite simply, blow that record out of the water.

The Congressional Budget Office recently totaled up all the legislative measures taken so far - as well as the effects of a weaker economy (payments for unemployment benefits would be going up even with the recent law) - and they estimated this year's budget deficit at $3.7 trillion, which they forecast would represent about 18% of GDP.

As if that weren't enough, the House of Representatives just passed a bill that would add another $3 trillion to the debt. Although a detailed year-by-year cost estimate isn't yet available on the spending provisions, and the bill is dead-on-arrival in the Senate, which isn't going to rubber stamp that proposal, it's likely Congress and President Trump will end up compromising on some sort of additional measures that drive the deficit even higher. As a result, we're guessing the budget gap for the current fiscal year ends up closer to $4 trillion, or about 20% of GDP, the highest since 1943-45.

Given the economic crater generated by the Coronavirus and related shutdowns, as well as the heavy-handed legislative response, budget deficits will be enormous in the years ahead, too.

In spite of these sky-high numbers, it's important to recognize that the US government is not about to go bankrupt. The debt, while large (and growing), remains manageable. Before the present crisis, the average interest rate on all outstanding Treasury debt, including the securities issued multiple decades ago, was 2.4%. Now, our calculations suggest newly issued debt is going for about 0.25%, on average, which applies to both the recent increase in debt as well as portions of pre-existing debt coming due and getting rolled over at lower interest rates.

When debt that costs 2.4% gets rolled over at around 0.25%, that's a great deal for future US taxpayers. The problem is, the Treasury Department has been decidedly stubborn about not issuing longer-dated securities – think 50 and 100-year bonds – that would allow taxpayers to lock-in these low interest rates for longer, making it easier to spread out the cost of the extra debt incurred throughout the crisis.

As a result, if (or more like when) interest rates go back up, the interest burden generated by the national debt could go up substantially.