Editor’s Note: This essay is part of Debt, Inflation, and the Future: A Symposium.
Massive demand-side stimulus, combined with constraints on the supply-side in the form of higher taxes, is a sure recipe for inflation and eventual recession. The Fiscal Year 2021 U.S. budget deficit will amount to 15% of GDP after the passage of an additional $1.9 trillion in demand stimulus, according to the Committee for a Responsible Federal Budget – a proportion that the United States has not seen since World War II.
It is hard to avoid the conclusion that the Biden administration’s fiscal irresponsibility arises from a cynical political calculation. It evidently proposes to employ the federal budget as a slush fund to distribute benefits to various political constituencies, gambling that the avalanche of new debt will not cause a financial crisis before the 2022 congressional elections. The additional $2.3 trillion in so-called infrastructure spending that the administration has proposed consists mainly of handouts to Democratic constituencies.
During the 12 months ending in March, the deficit stood at 19% of GDP. Even worse, the Federal Reserve absorbed virtually all the increase in outstanding debt on its balance sheet. During the past 12 months, foreigners have been net sellers of U.S. government debt. (See Figure 1.) The U.S. dollar’s role as the world’s principal reserve currency is eroding fast, and fiscal irresponsibility of this order threatens to accelerate the dollar’s decline.
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