Todd G. Buchholz

Opinion | US coronavirus stimulus: in the end, it’s Americans who must pay for it

Inflation helped reduce the federal government’s massive debt obligations post WWII, but such a strategy won’t work with today’s investors, who have other options

The US must issue longer-term bonds at today’s low rates and reform its retirement programmes to defuse the debt bomb, or face bankruptcy

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White House Chief of Staff Mark Meadows and US Treasury Secretary Steven Mnuchin head for a meeting at the US Capitol in Washington, DC, on August 1, to discuss measures to bolster a US economy hobbled by Covid-19. Photo: Bloomberg

Todd G. Buchholz

Published: 1:30am, 22 Aug 2020Updated: 3:20am, 22 Aug 2020

The US today not only looks ill, but dead broke. To offset the pandemic-induced economic downturn, the US Federal Reserve and Congress have marshalled staggering sums of stimulus spending, out of fear that the economy would otherwise plunge to 1930s soup-kitchen levels.

The 2020 federal budget deficit is projected to reach 18 per cent of GDP, and the US debt-to-GDP ratio hurdle over the 100 per cent mark. Assuming that America eventually defeats Covid-19, how will it avoid the approaching fiscal cliff and national bankruptcy?

To answer such questions, we should reflect on the lessons of World War II, which did not bankrupt the US, even though debt soared to 119 per cent of GDP.

WWII was financed with a combination of roughly 40 per cent taxes and 60 per cent debt. Buyers of that debt received measly returns. These US bonds were bought predominantly by American citizens out of a sense of patriotic duty.

Flags for the US and the US Federal Reserve fly outside the Federal Reserve building in Washington, DC, on August 18. American citizens helped finance World War II by buying US bonds. Fed employees also got in on the act, holding competitions to see whose office could buy more bonds. Photo: Bloomberg

Patriotism aside, many Americans bought Treasury bonds out of a sheer lack of other good choices. Until the deregulation of the 1980s, federal laws prevented banks from offering high rates to savers.

While US equity markets were open to investors, brokers’ commissions were hefty, and only about 2 per cent of American families owned stocks. Investing in the stock market seemed best-suited to Park Avenue swells, or for amnesiacs who had forgotten the 1929 crash. By contrast, a majority of American households own equities today.