Massive Deficit Spending in US Won’t Undermine Dollar, Spark Inflation or Weaken US Economy, Inozemtsev Says

Paul Goble

            Staunton, May 7 – The US government budget deficit this year will be between 21 and 23 percent of GDP, the result of massive borrowing to compensate businesses and individuals for losses as a result of restrictions imposed to halt the spread of the coronavirus pandemic, Vladislav Inozemtsev says.

            That figure is comparable to the situation the US found itself in during World War II when its government deficit was 26.9 percent of GDP in 1943 and 21.2 percent in 1944.  Many believe this will lead to a catastrophe and oppose such steps in Russia, but the Russian economist is not among them (rosbalt.ru/posts/2020/05/06/1841861.html).

            He gives three reasons for his dissent. First, Washington is not having to pay high interest on its new debt obligations and so the cost of carrying this debt is relatively small, 25 to 30 billion US dollars or about 0.11 to 0.13 percent of GDP. That will not impose any serious burden on the government or society.

            Second, because the money is going into an economy that has not functioned for two months, it will compensate for incomes not received rather than become something that will trigger inflation.  In fact, the rate of inflation has been falling in the US and shows no signs of igniting in a dangerous spiral.

            And third, on the currency markets, the dollar remains very stable: it has strengthened relative to the euro and pound by three to five percent since the start of the year and fallen only one percent relative to the yen.  There is no flight from the dollar, and the new debt obligations will only attract more foreign money into the US.

            “In other words,” the economist continues, we are not observing the death agony of the American economy and the dollar “but rather the formation of a new financial system based on zero interest rates and a consistently high possibility for the financing of economic growth through an increase in government borrowing.”

            According to Inozemtsev, “in such an economy, it is more rationally to compare not the budget deficit to GDP but the total debt relative to the size of national wealth.”  If one does that, he argues, there is a fundamental change in the picture of the world that people are accustomed to seeing.

            The Russian economist’s conclusions are important because they serve as a warning to those in Moscow and elsewhere who believe that Washington is on a path to self-destruction. Instead, what it is doing in this sector may represent not only an effective but relatively inexpensive down payment on its salvation.