Is US coronavirus spending and ballooning debt at risk of stoking global asset bubbles?
- Washington’s massive spending on coronavirus relief is adding to its huge debt levels and priming asset bubbles, analysts say
- Despite concerns, the US dollar-based global financial system makes it hard for countries like China to reduce their exposure
Another US economic stimulus package, coupled with the Federal Reserve’s willingness to keep its monetary tap on, could see trillions of dollars pumped into the global financial system and lead to a series of asset price bubbles, analysts have warned.
The so-called Modern Monetary Theory, currently in vogue among some financial leaders, argues the US government can enact infinite amounts of stimulus and spend as necessary on all desirable causes because the Federal Reserve can always print money to pay back the credit.
The US keeps printing money and this … pushes financial and property assets into a bubble that eventually bursts
But America’s ballooning debt and deficit spending are also being sustained by foreign countries who buy US Treasury securities and dollar-denominated assets.
“The US keeps printing money and this becomes problematic because it pushes financial and property assets into a bubble that eventually bursts,” said Raymond Yeung, Greater China chief economist at ANZ Bank. “Yet until there is a change in world order, everyone has to play along in a US-centric global economy.”
Since the global financial crisis more than a decade ago, both government and corporate debt have been rising in many countries, but particularly in the US, which now owes more than any nation in the world .
US general government borrowing – which includes federal, state and local government debt – surged from 61 per cent of gross domestic product (GDP) at the end of 2007 to 99 per cent in 2013 and 127 per cent in the second quarter of last year, data from the Bank of International Settlement showed.
Foreign governments owned US$7.07 trillion, or 26 per cent, of America’s US$27 trillion national debt as of October last year, before the passage of the most recent US government stimulus plan in December.
In the second quarter of 2020, US corporate debt excluding the financial sector stood at 84 per cent of GDP, up from 67 per cent at the end of the second quarter in 2007. However, household debt dropped to 77 per cent of GDP from 98 per cent over the same period.
Corporate debt rose sharply last year as companies borrowed heavily to survive the economic impact of the coronavirus pandemic.
Nevertheless, the US enjoys the highest sovereign credit profile because of its status as the issuer of the world’s primary reserve currency, even though it spends more than it earns.
[It is] hard for everybody to reduce their dependence on the US dollar and the US financial system
The US has a triple-A credit rating from f inancial rating agencies Moody’s and Fitch Ratings. Standard and Poor’s rates the US government at AA+.
“The unique and central roles of the US dollar and US Treasury bond market in the international financial system do indeed support the US government’s debt capacity,” said Atsi Sheth, managing director of the credit strategy and research team at Moody’s Investors Service.
“We do not expect the US dollar’s status as a reserve currency to meaningfully shift in the near term.”
In early 2009, China’s premier at the time, Wen Jiabao, said he was “a bit worried” about the safety of the nation’s large US Treasury holdings. He made the remarks after the US Federal Reserve started its unconventional quantitative easing programme in which money was pumped directly into the financial system by buying up US Treasury and mortgage-backed securities.
In the current context, China reduced its holding of US Treasury securities in October last year for the fifth consecutive month to US$1.062 trillion, the lowest level since February 2017, US Treasury data showed.
But the US dollar’s share in global currency reserves is still by far the most dominant, remaining at 60 per cent today compared to the yuan’s share of 2 per cent, according to the International Monetary Fund.
Beijing’s credit tightening aims to stabilise monetary policy, cut debt
“[It is] hard for everybody to reduce their dependence on the US dollar and the US financial system. It will be a long-drawn-out process,” said Louis Kuijs, head of Asia economics at Oxford Economics.
“China has been trying to do that in part by trying to increase the role of the yuan. But progress has been very, very modest.”
The US dollar lost 6.7 per cent of its value against a basket of major currencies last year under the colossal weight of US debt and the nation’s large trade deficit.
On Tuesday, the US dollar index stood at 90.5, trading near its lowest level in more than two years. It is forecast to fall at a slower pace this year, slipping 2 per cent from current levels to 88.7 by year end, according to economists polled by Bloomberg.
After China’s yuan rose 6.3 per cent against the US dollar last year, its appreciation is also expected to slow, edging up 1 per cent to 6.4 per US dollar by year end, according to the survey.
06:35
US Congress certifies results of presidential election after Trump supporters storm the Capitol
For now, the additional US stimulus package is helping foster confidence in a global economic recovery, shifting capital flows into riskier emerging markets and into Asian equities and currencies, and away from safe-haven dollar assets.
But there are ongoing concerns about the ability of US policymakers to reduce federal budget deficits, especially given that trillions of dollars of unfunded liabilities included in social security and Medicare programmes are not included in the total national debt.
“Somebody has to be doing all the borrowing. And [the risk is] that the one country who does it will blow up eventually,” said Michael Every, global strategist at Rabobank.
“[By the time] you realise that, there’s actually no way out of this. It’s just a question of when it goes wrong, where and how.”
