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The U.S. Capitol Building is reflected against an ambulance along the East Front on Capitol Hill in Washington, on July 16, 2020.Tom Brenner/Reuters

Economists and deficit hawks have warned for decades that the United States was borrowing too much money. The federal debt was ballooning so fast, they said, that economic ruin was inevitable: Interest rates would skyrocket, taxes would rise and inflation would probably run wild.

The death spiral could be triggered once the debt surpassed the size of the U.S. economy – a turning point that was probably still years in the future.

It actually happened much sooner: sometime before the end of June.

The coronavirus pandemic, and the economic collapse that followed, unleashed a historic run of government borrowing: trillions of dollars for stimulus payments, unemployment insurance expansions, and loans to prop up small businesses and to keep big companies afloat.

But the economy has not drowned in the flood of red ink – and there is a growing sense that the country could take on even more without any serious consequences.

“At this stage, I think, nobody is very worried about debt,” said Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics and a former chief economist for the International Monetary Fund. “It’s clear that we can probably go where we are going, which is debt ratios above 100 per cent in many countries. And that’s not the end of the world.”

That nonchalant attitude toward what were once thought to be major breaking points reflects an evolution in the way investors, economists and central bankers think about government debt.

As levels of debt among rich nations like the United States and Japan have climbed relentlessly in recent decades, the cost of carrying that debt – reflected in interest rates – has tumbled, leaving little indication that markets were losing confidence in the willingness and ability of these countries to carry their financial burdens.

And since the 2008 financial crisis, traditional thinking about borrowing by governments – at least those that control their own currencies – has further weakened, as central banks in major developed markets became enormous buyers in government bond markets.

Critics repeatedly said this circular form of fiscal finance – in which one arm of the government, the central bank, basically creates the money needed to fund the arm of government that taxes and spends – would inevitably lead to a spiral of inflation, a spike in interest rates or a loss of confidence in the currencies. It didn’t.

“This is a 40-year pattern,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a proponent of what’s often called Modern Monetary Theory. That view holds that countries that control their own currencies have far more leeway to run large deficits than traditionally thought. “The whole premise that deficits drive up interest rates, it’s just wrong,” she said.

At the end of last year, the United States was about US$17-trillion in debt – roughly 80 per cent of the country’s gross domestic product. In January, government analysts predicted that debt would approach 100 per cent of the GDP around 2030. But by the end of June, the debt stood at US$20.53-trillion, or roughly 106 per cent of GDP, which shrank amid widespread stay-at-home orders. (These numbers do not count trillions more the government owes itself in bonds held by the Social Security and Medicare trust funds.)

That more than 25 percentage-point surge would represent the largest annual leap in U.S. indebtedness since Alexander Hamilton founded the nation’s credit in the 1790s, outpacing even the debt growth at the peak of the Second World War, according to data from the Congressional Budget Office.

And it is not over yet. The Treasury is expected to borrow over US$1-trillion more through the end of the year – and that is without counting another stimulus package. Republicans in Congress have pushed for a US$1-trillion package, while Democrats have already passed their own plan with a price tag of more than US$3-trillion.

“What’s very clear is that the U.S. economy has some room,” said Rick Rieder, global chief investment officer of fixed income at BlackRock, which manages more than US$7-trillion in investments for clients, including more than US$2-trillion in bonds. “I would argue that we still have room now for another fiscal package.”

Talks on such a package are currently stalled, with the surging levels of debt often cited by Republicans lawmakers as a reason to oppose further fiscal action. But even the current situation would have been unthinkable not long ago.


Economists have long told a story in which debt levels this large inevitably ignited an economic doom loop. Towering levels of debt would freak out Treasury bond investors, who would demand higher interest rates to hand their cash to such a heavily indebted borrower. With its debt payments more expensive, the government would have to borrow even more to stay current on its obligations.

Neither tax increases nor spending cuts would be attractive, because both could slow the economy – and any slowdown would hurt tax revenues, meaning the government would have to keep borrowing more. These scenarios frequently included dire predictions of soaring interest rates for business and consumer borrowing and crushing inflation as the government printed more and more money to pay what it owed.

But instead of panicking, the financial markets are viewing this seemingly bottomless need for borrowing benignly. The interest rate on the 10-year Treasury note – also known as its yield – is roughly 0.7 per cent, far below where it was a little over a year ago, when it was about 2 per cent.


Expectations for economic growth and inflation are the crucial drivers of interest rates, and such low rates very likely mean investors expect a long period of piddling growth. But they also signal that investors see almost no chance that the United States, which has one of the best track records of any borrower on earth, will stiff them by defaulting.

One big reason: As during the Second World War, much of the money the government has borrowed is coming from an arm of the government itself, the Federal Reserve. The central bank has increased its holdings of Treasury securities by more than US$1.8-trillion since March, effectively creating all the new money it needed to buy them. For many years, such arrangements were viewed as something that was done in wobbly emerging market economies.

But since the financial crisis of 2008 and the deep recession that followed, central banks in the richest nations in the world – the Fed, as well as the Bank of Japan, the Bank of England and the European Central Bank – have printed large amounts of money to buy government bonds and spur economic growth by lowering long-term interest rates.

The bond-buying programs in the United States were some of the world’s most aggressive. Critics said they would lead to disaster, with the increase in dollars setting off a surge of inflation similar to the one that dogged the economy in the 1970s. But inflation has stayed low, consistently coming in below the 2-per-cent target set by the U.S. Federal Reserve.

That is not to say conditions will stay that way. Earlier this month, the price of gold, typically bought by investors as a hedge against inflation, rose above US$2,000 an ounce – a record – suggesting that some could be buying a bit of insurance against a sharp rise in the future.


There is a debate about whether a large amount of government debt hamstrings economic growth over the long term. Some influential studies have shown that high levels of debt – in particular debt-to-GDP ratios approaching 100 per cent – are associated with lower levels of economic growth. But other researchers have found that the relationship is not causal: Slowing economic growth might lead to higher levels of debt, rather than vice versa.

Others have found that they do not see much of a relationship between high levels of debt and slow economic growth for rich developed countries. But they do see such a relationship for poorer developing economies, which are much more reliant on foreign investors, who could be spooked by rising levels of debt. Such situations have repeatedly played out in emerging markets over the years.

Even so, the experience over the last decade has drastically shifted the way economists and investors think about how the United States funds itself.

“Fiscal constraints aren’t nearly what economists thought they were,” said Daniel Ivascyn, chief investment officer for PIMCO, which manages nearly US$2-trillion in assets, mostly in bonds. “When you have a central bank essentially funding these deficits, you can take debt levels to higher debt levels than people envisioned.”

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