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The U.S. national debt has skyrocketed under President Trump. While the national debt was still about $20 trillion when he took office, at the time of writing it is over $27 trillion. We can attribute a large part of this increase to the corona crisis, as the deficit for this year is estimated to already exceed $3 trillion. And that's not all, because with a second wave of corona measures, even more fiscal stimulus is probably needed.
The big question is how the U.S. government is going to finance these deficits. In the past, foreign countries played an important role in this, as central banks hold dollar reserves in the form of US Treasuries. In effect, foreign countries financed part of the US budget deficits.
In recent years, however, central banks have been adding fewer and fewer US government bonds to their balance sheets. In fact, over the past twelve months, the total assets of central banks have remained unchanged just over $7 trillion, while the U.S. national debt rose by more than $3 trillion over the same period. And the future doesn't look much better, as more countries are drawing on their dollar reserves due to the corona crisis.
Now that foreign countries are no longer able or willing to finance the American deficits, the US government is dependent on domestic financing. So far, that seems to be working. The question, however, is whether the market can absorb a second wave of new government bonds. According to Kristjan me of asset manager Schroders, this will be quite a challenge.
"If another stimulus program of several trillion dollars is approved by Congress, it will increase the budget deficit - partly due to lower tax revenues - to 20% of GDP. Looking ahead, we expect the U.S. Treasury to continue issuing a lot of bonds. The key question is who will finance the issuance of this large amount of government bonds."
Since the credit crisis of 2008, the US central bank has started buying government bonds. To date, the Federal Reserve has already $4.5 trillion so-called Treasuries on its balance sheet. In doing so, the central bank is trying to keep interest rates low, so that the US government can continue to borrow cheaply. In March, the central bank even indicated that it is willing to buy unlimited government bonds. In doing so, it is mainly trying to send a signal to the market that there will always be a buyer for the debt securities.
The central bank hopes that the market will continue to buy enough government bonds. However, not everyone is sure. So Warned Randal Quarles of the Fed recently said that the market cannot yet do without central bank support. Especially in times of stress, support from the central bank would continue to be needed. The market would then not have sufficient capacity to buy all government bonds.
Last year, the first signs of stress in the bond market became visible with a crisis in the repo market. According to analysts, banks did not have enough dollars at the end of the quarter due to a combination of circumstances. As a result, they did not provide liquidity, causing the interest rate on short-term loans to skyrocket to 10%. The Fed then had to Intervene in the repomarkt and then decided to restart its buy-back program. This put an early end to the central bank's intention to reduce its balance sheet.
Foreign countries are buying fewer and fewer government bonds, central banks are buying more and more
Percentage of U.S. government debt held by other central banks
This contribution was made from Geotrendlines
