Debt and Deficits

Gary Pzegeo, CFA
June 09, 2020

Wartime analogies have been used to describe the fight against the novel coronavirus. Given the vast amount of resources deployed through various economic stability programs, government deficits have also adopted a similar wartime appearance. We consider the potential outcomes of these wartime-sized deficits.

The magnitude of both human and economic costs of COVID-19 is still being counted. The average forecast for gross domestic product (GDP) losses in 2020 is nearly 6% and would be the largest contraction in the U.S. economy in the post-World War II era.1 The size and speed of policy response has been equally massive. Resources deployed to fight the virus in the U.S. total over $3 trillion, or 14% of GDP. Political leaders have appropriately adopted wartime analogies to describe the fight against the virus. Government deficits have also taken on a wartime appearance, given the accumulation of bills associated with various economic stability programs. As Federal Reserve Chairman Jerome Powell noted when addressing questions from those reluctant to add debt, “This is not the time to act on those concerns. This is the time to use the great fiscal power of the U.S.” Regardless of the Chairman’s warning, we are going to take a look forward to consider the potential outcomes of wartime-sized deficits in the post-COVID-19 environment.

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This is the third in a multi-part series: "After COVID-19: Adapting to a changed landscape".

Part 1: An accelleration in de-globalization
Part 2: The size and scope of government

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service

1 Bloomberg Survey of Economists, data as of May 2020.