The collateral damage of the war against COVID-19 could be national bankruptcy, says this observer.
To offset the pandemic-induced “Great Cessation,” the US Federal Reserve and Congress have marshalled staggering sums of stimulus spending out of fear that the economy would otherwise plunge to 1930s soup kitchen levels.The 2020 federal budget deficit will be around 18 per cent of GDP, and the US debt-to-GDP ratio will soon hurdle over the 100 per cent mark. Such figures have not been seen since Harry Truman sent B-29s to Japan to end World War II.
Buyers of that debt received measly returns, with the Fed keeping the yield on one-year Treasuries at around 0.375 per cent – compared to the prevailing 2-4 per cent peacetime rates. Ten-year notes, meanwhile, yielded just 2 per cent, which actually sounds high nowadays. Moreover, the thought of swapping US dollars for higher-yielding foreign assets seemed ludicrous, and doing so might have brought J Edgar Hoover’s FBI to your door.
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