Paying America’s bills amid a pandemic
With the U.S. federal budget deficit over $3 trillion, Brian Rehling of Wells Fargo Investment Institute provides an update to the report “Paying America’s Bills” during an unprecedented time when the government has stepped in to help stabilize the economy.
Brian Rehling, head of global fixed income strategy for Wells Fargo Investment Institute and author of the report “Paying America’s Bills (PDF),” discusses what investors need to know about how the U.S. government manages its finances.
At $26 trillion, our debt is certainly staggering compared to $21.3 trillion just two years ago. The budget deficit for fiscal year 2020 is about $3.3 trillion. These are currently manageable amounts — what’s troubling is the prospect for its continued growth over the long term.
This year and into 2021, we’re going to see a significant increase in the yearly deficit the government is running. This will add to the overall debt, and we’ll see that return to more normal levels in the years ahead. The (stimulus) spending was really required to help businesses, help consumers, and help everyone in the country make it through what’s been a very difficult economic response to the pandemic.
The Treasury Department is tasked with making sure all those bills get paid. They do that by issuing debt. Remarkably, despite the significant increase in debt that the Treasury has issued, we’ve seen interest rates remain and actually fall to extremely low levels. There’s a tremendous amount of demand even for this increased amount of Treasury securities. We believe the Treasury has done a good job of managing the debt expense and making sure all the bills are paid and doing so at a very low cost.
Since the debt and the deficit need to be financed, a low-rate environment is extremely helpful in terms of paying those bills to keep costs lower. That has been very beneficial during this period of deficit spending. Where we become concerned is that over time, those interest rates start to increase. As that debt matures and needs to be refinanced, the expenses are greater and consume a larger portion of the annual government budget.
We don’t expect a crisis, but the large debt levels are likely to reduce the financial flexibility of the government in future crises. It’s also likely to keep interest rates relatively low because the government does not have that ability to spend more money. That reduced flexibility tends to lead to lower growth rates and lower interest rates over time. For investors who are in retirement or approaching retirement, this low-rate environment is likely to persist. Investors should think about how they manage their assets in that type of environment. Look for opportunities to add yield and for opportunities that could potentially outperform what’s likely going to be a very low-rate environment well into the future.
Wells Fargo Investment Institute explores the basics of the rising U.S. debt in this 2018 Wells Fargo Stories article.
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