The US budget deficit has recently hit an all-time high of $1.7 trillion, nearly doubling the previous record deficit.
According to the US Treasury Department, the budget deficit for the first half of the year, October to March, was up to £743.5 billion.
The large budget deficit is mainly attributed to the economic fallout during the COVID-19 Pandemic.
Many nations experienced an economic slowdown or contraction during the pandemic as a direct result of the loss of confidence in economic agents.
John Maynard Keynes believed especially that economic agents such as businesses and humans are governed by ‘animal spirits,’ a gut feeling.
The COVID-19 pandemic changed the ‘gut feeling’ of economic agents alike as they became less confident due to the higher uncertainty regarding future events.
Households did not know if they would keep their jobs, for this reason, businesses also did not know if they would see the same demand for sales.
Consequently, as uncertainty rises and confidence falls, the marginal propensity to save consumers and businesses increases, thus decreasing the spending of these agents in the economy.
This is significant because it leads to a contraction in aggregate demand, either slowing down economic growth or potentially leading to a recession.
When this occurs, the Keynesian view is that governments should begin to ramp up spending to fill up the expenditure vacuum which is there due to decreased consumer and business spending.
Consequently, because aggregate demand is made up of consumer, business and government spending, as well as net exports, if government spending increases, aggregate demand will move outwards.
This drives short-run economic growth forwards, so, because of Keynesian economics, the US government, and many other governments alike, have also been subjected to large budget deficits.
The US budget, in particular, has increased due to stimulus packages and other spending plans announced by the current Biden administration.
For example, Biden has recently announced a $1.9 trillion package which included $1400 being given towards Americans hit hard by the pandemic.
The package not only includes these direct payments but also hopes to provide support to various other sectors of the economy.
In total, last year’s deficit, ending September 30 accumulated $3.1 trillion. This year’s deficit is predicted to total $2.3 billion, however, these estimates do not include the $1.9 trillion stimulus package.
But where is the US government getting all of this money from?
The answer are bonds, debt securities which governments issue to raise funding for large projects.
Although these are typically used for infrastructure projects, during periods of recession, these bonds can be used to enable the government to overspend.
These bonds are typically sold to investors and cant be bought back, the latter is to increase the money supply.
For this reason, central banks are typically the largest holders of government debt.
So, investors and banks buy these bonds as they are incredibly safe investments as the likelihood is that the government will pay them back, and in return, the government gets an injection of cash in the form of a loan.
Thus, the US government can overspend its budget to get the economy running again, showing why its debts have accumulated so much in recent years.
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Research compiled by Jonas Theaker.