OBELA Analysis

In May 2021, President Joseph Biden released his proposed 2022 U.S. budget, outlining spending levels for the next ten years. The program has been modified during congressional negotiations, as the real cost of some policies could be excessive.

The constant deficit of the US government has not favored the economic growth of the country. The increase in public debt at an average annual rate of 7% between 2010 and 2021 translated into an annual GDP growth rate of 1.9% in the same period. According to estimates in the congressional resolution, its growing debt issuance will continue.

If approved, the question is not just whether these expenditures and investments have an impact on national income and are capable of stimulating private investment in the midst of the post-pandemic recovery.

Since economic activity resumed after the lockdowns, high rates of inflation have been observed around the world, although some monetary authorities have indicated that it is transitory. . The integration of global value chains, the magnitude of international trade and the productive and financial interdependence have shaped this post-confinement inflation.

Inflation is far from transitory, companies are facing a combination of supply chain challenges, as well as higher costs for energy, raw materials, packaging and shipping, all while becoming one of the biggest concerns of consumers around the world.

Central banks have taken a more aggressive stance. US Fed officials accepted that high inflation, which has risen to 5 percent, will be long-lasting. These measures are contractive, contrary to the much desired recovery of the product.

The reasoning of modern monetary theory holds that countries with reserve currencies can maintain unlimited levels of fiscal deficits and public debt because they have financing available. The evidence, however, shows that massive deficits do not mean economic dynamism in the US.

After 2008, federal deficits have doubled from about 60% of GDP to about 120%. Emerging nations shift their resources to China through the US deficit instead of growing, since the world is one and the borders are all open, and trade is unrestricted.

US debt in nominal amounts is more than that of the rest of the world combined. So monetary inflation exists and hits first the most deficit countries, then the least, and finally the rest of the world as imported inflation.