Indebted

This week the US reached a disturbing milestone. The country’s debt, driven by pandemic-related spending, just grew larger than its economy.

The news was buried under a snowstorm of political controversy. But it is the item that will have longest lasting effects on the US. Long after the virus is gone and the polarized politics tamed, the outstanding debt will continue to have hangover effects.

Federal Reserve chairman Jerome Powell grimly warned: “The US federal budget is on an unsustainable path, has been for some time.” He said this as the US ended its fiscal year on Sept. 30 with an annual deficit of $3.13 trillion. That represents 15.2 percent of GDP.

The deficit will continue to be a problem. With businesses devastated by the pandemic, there will be less revenues to be collected. With the stimulus package being pushed by the US Congress, public spending will have to spike by several trillion to prevent the American economy from cratering. Much of that will flow to direct subsidies to rescue the unemployed rather than to infrastructure that will improve capacity in the longer term.

At end-September, US debt soared to 102 percent of GDP. This is the highest since 1946, when debt climbed to 106.1 percent of GDP after all the war spending and the expansionary public spending to cure the effects of the Great Depression. In actual dollar terms, this is the largest debt the US government has incurred.

Over the next so many years, given the debt burden it must service, the US government will have no money to invest in much needed infrastructure, in research and development and in improving its human capital. This signals a long period of economic stagnation, even decay.

Donald Trump’s core political base of white, non-college educated and semi-skilled people will tend to blame immigrants for the stagnation of the American economy. Whoever wins next month’s elections will likely have to deal with right-wing radical groups such as the one that plotted to kidnap the governor of Michigan this week.

Other social problems such as drugs and communal violence will likely increase, given the mounting economic stresses. If Trump somehow manages to remain in office, there can only be even more political turbulence down the road.

A large portion of American debt paper is held by China. That is the irony of it all. Over the past few months, Washington has sharpened its anti-China rhetoric even as it sought to tap into the Asian power’s financial surplus to finance its own deficits.

The US is still, by most measures, the largest economy in the world. China’s economy is the second largest. But as the US economy stagnates, burdened by an unsustainable national debt, China’s technology-driven economy continues to grow even at this time of global recession. The point at which China surpasses the US in economic strength moves closer by the day.

China’s growing economic (and military) power will force a dramatic realignment in global politics. America’s unilateralism, heightened during the Trump years, hastens the realignment.

All of Trump’s clowning has caused the rest of the world to lose confidence in America’s capacity to exercise moral, ideological, economic and military leadership. Many countries feel trapped between an old superpower with its decadent politics and stagnant economy and a rising Asian power whose methods of rule they may find disagreeable.

Prudent

We know what it means for debt to overrun revenues.

In the mid-eighties, the Philippines fell into a debt crisis. We had neither the revenues nor the hard currency to fully service our debts. We entered into a long period of austerity to raise enough money to pay back our debts. During that period, our infrastructure deteriorated and our educational and health systems fell below standard.

It took us many years to work down our indebtedness. We refinanced our old and expensive debt with new and cheaper debt instruments. We maintained the highest standards of fiscal discipline to improve our sovereign risk ratings, enabling us to float lower priced bonds to pay off bank borrowings.

By 2019, we had brought down our outstanding debt to just 39 percent of GDP. Our credit rating improved to the best we ever had. Our gross international reserves grew to over eight months’ worth of imports due to investment inflows and the hefty remittances made by our heroic migrant workers.

With wider access to the bond markets and strong support from our development partners, we were able to raise financing for an ambitious infra modernization program that will bring us up to par with our neighboring economies. The infra program in turn allowed us to create jobs and open many economic opportunities. The path to a long period of sustained growth seemed open.

Then the pandemic struck. Our economy fell into recession.

Government will play a key role as we struggle to climb out of the hole and recover our growth momentum. Without a well-targeted stimulus package, many of our enterprises will lose viability and shed jobs. This will compound the recession brought about by the lockdowns and the inhospitable global economy.

So far, we have maintained prudence in the stimulus measures crafted to help our economy recover. Given the dire situation, it is easy to throw all fiscal discipline to the wind and pander to constituencies demanding subsidies at every turn.

We negotiated emergency financing to support our pandemic-struck budget. Fortunately, all the policy reforms and fiscal discipline of the past few years gave us enough headroom to support the unexpected spending the health crisis demanded.

At this point, our debt remains sustainable.