After five years in which federal budget deficits gradually climbed toward $1 trillion, the coronavirus pandemic forced Washington to borrow $1 trillion per month between April and June. And this is just the beginning. The unlikelihood of a quick economic recovery and the additional relief legislation sure to come out of Congress should together push the deficit to roughly $4 trillion in 2020 and ensure that it averages $2 trillion annually over the rest of the decade.
As a result, the national debt held by the public — $17 trillion earlier this year — is projected to reach a staggering $41 trillion by 2030, even before accounting for any additional pandemic-relief measures or the expensive proposals that Democrats are salivating to enact if they sweep the White House and Congress this November.
Who is going to lend the federal government all this money? Politicians promising trillions in new spending seem unconcerned with the question. Financial markets, which are trading ten-year Treasuries at interest rates of 0.7 percent and 30-year Treasuries at interest rates of 1.3 percent, don’t seem worried, either. Many analysts see a world awash in excess savings and a Federal Reserve dedicated to pouring liquidity into the market. Yet borrowing $24 trillion (or more) over the decade would create a nearly unprecedented burden: The debt held by the public would rise from 79 percent to 128 percent of GDP, in the largest debt surge since World War II. But when World War II ended in 1945, the debt burden quickly declined; our present national debt is set to continue rising steeply for decades, because Social Security and Medicare face a 30-year cash shortfall of more than $100 trillion.
Washington has easily financed this year’s exorbitant borrowing. Since March 11, the national debt has jumped by $3.1 trillion. Treasury data through May suggest that foreign borrowing has financed virtually none of this new debt. Instead, the Federal Reserve has increased its Treasury holdings by $1.7 trillion (from $2.5 trillion to $4.2 trillion), and the remaining $1.4 trillion has come from domestic savings such as banks, mutual funds, and state and local governments.