The Covid-19 pandemic fueled the US budget deficit and government borrowing
US national debt exceeded $30 trillion for the first time on Tuesday, spurred on by high borrowing during the Covid-19 pandemic, according to data from the US Treasury Department.
Japan and China remain the top foreign creditors, holding $1.3 trillion and $1.08 trillion in US Treasuries respectively, and are owed interest on all the money that has been borrowed. Nearly $8 trillion of the US’ debt is owed to foreign entities, which – aside from Japan and China – also include major creditors like the United Kingdom, Luxembourg, Ireland, Brazil, Canada, France, India, and Belgium, as well as Taiwan and Hong Kong.
A further $6.5 trillion is owed by the US federal government to itself, mostly to Social Security trusts and the Military Retirement fund. Over the course of the pandemic, the Federal Reserve also doubled its balance sheet to $8.9 trillion by aggressively buying trillions of dollars in Treasury bonds and securities.
The shocking number was reached far sooner than anticipated, with US officials and economists failing to predict the Covid-19 pandemic and subsequent response, which inflated government spending, and subsequently, national debt by as much as $7 trillion since the end of 2019.
The US budget deficit totaled $2.77 trillion for fiscal year 2021, falling just short of the previous year’s record-breaking numbers, but still in line with the massive Covid-era spending. For the fiscal year of 2020, the US posted an eye-watering deficit of $3.13 trillion.
The $30 trillion mark “arrived years earlier than previously projected,”according to the New York Times, due to government coronavirus programs which “funded expanded jobless benefits, financial support for small businesses and stimulus payments” – all of which was paid for with borrowed money.
David Kelly, the chief global strategist for JPMorgan Asset Management, told CNN that the debt means the US is “going to be poorer in the long term” and claimed “American taxpayers will be paying for the retirement of the people in China and Japan, who are our creditors.”
Peterson Foundation CEO Michael Peterson, however, explained that the “structural problems we face fiscally existed long before the pandemic” and that Covid-19 merely “exacerbated the problem.”
US Commerce Department data shows the nation’s economy grew by 5.7% last year – its best performance since 1984 – as it roared back from the pandemic lockdowns. However, analysts expect the growth to slow this year, as the government scales back stimulus spending and the Federal Reserve raises interest rates. Other risks include high inflation and threats from new Covid variants, including Omicron, they say.
“The economy is decelerating and downshifting,” the chief economist for the Americas at Natixis and ex-chief economist for the National Economic Council under former President Donald Trump, Joseph LaVorgna, told CNBC. “It’s not a recession, but it will be if the Fed tries to get too aggressive,” he said.
Statistics show that GDP surged by an impressive 6.9% in the fourth quarter of 2021, while the measure of all goods and services produced in the country grew 5.7% on an annualized basis.
Much of that end-of-year gain was fueled by an inventory rebuild that “contributed 4.9 percentage points to the total, led primarily by the auto sector,” the chief international economist at ING, James Knightley, was quoted as saying by CNN. Inventories were responsible for almost all of the third quarter’s 2.3% GDP increase.
“Given ongoing supply disruption we can’t count on this continuing to support growth in coming quarters,” Knightley said.
Tuesday’s ISM Manufacturing survey showed that the pace of new orders, while still showing gains, is slowing substantially.
Meanwhile, Goldman Sachs has trimmed its first-quarter GDP outlook to 0.5%, down from 2%. The bank also cut its full-year view to 3.2%, well below the current 3.8% consensus.
“Growth is likely to slow abruptly in 2022, as fiscal support fades and, in the near term, virus spread weighs on services spending and prolongs supply chain disruptions,” Goldman economist Ronnie Walker said in a note for clients seen by CNBC. “Q1 growth is likely to be particularly soft because the fiscal drag will be accompanied by a hit from Omicron.”
Bank of America also downgraded first-quarter GDP growth to 1% from 4%, and cut its full-year forecast to 3.6% from 4%.
European countries haven’t been boosting purchases of Russian gas beyond existing contracts despite energy crisis
Gazprom has resumed gas supplies to Europe through Ukraine, booking 109 million cubic meters of daily pipeline capacity, Bloomberg reported on Tuesday. Under the five-year contract, which expires in 2024, the company is expected to deliver 40 billion cubic meters of gas per year to Europe via Ukraine. The news triggered a long-anticipated decline in gas prices, with March futures dropping below $900 per thousand cubic meters.
January sales of Russian natural gas outside the former Soviet Union saw a massive drop of 41.3% year-on-year, while the country’s overall production has increased, Russian energy major Gazprom reported on Tuesday.
European inventory levels have reportedly sunk to historic lows over the past several months, sending energy prices in the region soaring, while some EU officials are accusing Gazprom of deliberately withholding supplies. However, Gazprom says additional supplies were not booked before February 2.
“The Company’s gas deliveries are carried out as requested by consumers in full compliance with contractual obligations,” Gazprom said in a press release.
Gazprom said earlier this month it hadn’t booked any monthly transit capacity via the Yamal-Europe gas pipeline for February. However, the company may still book the route via daily auctions.
The pipeline, which usually accounts for about 15% of Russia’s annual gas exports to Europe and Turkey, has been working in reverse mode since late December, putting additional pressure on European energy prices.
Meanwhile, working gas inventories in Europe’s underground gas storage facilities were lagging behind last year’s level by 27.2% as of January 30, Gazprom said on Tuesday, citing data from Gas Infrastructure Europe.
Over 81% of the fuel delivered during the summer is already pumped out from the facilities, according to the company, while “the total amount of working gas inventories in European UGS facilities was as low as 38.1 billion cubic meters on January 30, falling by 2.7 billion cubic meters below the historical minimum for this date.”
Separately, data of the booking platform seen by Reuters confirmed that Gazprom was set to resume westbound gas flows from Poland to Germany this week via the Yamal pipeline, restoring the normal flows after the route was reversed. Moreover, data from German network operator GASCADE reportedly confirmed the expectations for renewal of the westbound flows for eight hours initially.
Brussels and Washington have repeatedly raised concerns over potential disruptions in Russian energy supplies in response to sanctions the US and its allies are threatening to impose on the country in the event of a military assault on Ukraine. The Russian government denies having plans to invade the neighboring state, accusing the West of ramping up tensions through its provocative rhetoric.
European officials have protracted the certification of Russia’s Nord Stream 2 gas pipeline, which could have alleviated the energy shortages on the continent.
Germany’s household energy costs saw the greatest rise in 2021
The cost of heating and electricity in Germany increased by 107% and 41% respectively over the past year, Der Spiegel reported, citing a spokesperson of the Check24 portal, which compares prices for goods and services in the country.
According to data, the average household in Germany had to pay €1,193 for gas and fuel oil in January 2021, with the cost rising to almost €2,472 last month. The main reason for that was the sharp rise in energy prices, the newspaper said, adding that high wholesale gas prices have affected end-user prices.
The price for 5,000 kilowatt-hours of electricity hit a record high of €2,130 in January 2022. That is 41% higher than in the same month last year, Der Spiegel wrote.
According to the Check24 spokesperson, the dramatic rise was the result of the increased cost of generating electricity from coal and gas power plants, as well as a decline in production of renewable energy and higher domestic demand.
British lawmakers said on Wednesday that Big Tech companies whose online platforms carry fraudulent adverts should be made to compensate those who fall victim to such actions. The call is part of wider efforts to combat a growing epidemic of online fraud in Britain.
According to Mel Stride, chairman of the cross-party Treasury committee, there is not sufficient regulation governing social media and other websites where victims are often first lured in. He told Reuters that “The government should look at some kind of arrangement that makes the polluter pay.”
“Online platforms are hosting this stuff, not really putting enough effort into weeding it out, and indeed financially benefiting because they’re getting the advertising revenues,” Stride said.
The comments come as the Treasury committee published the findings on Wednesday of a report on economic crime. According to the report, trade body techUK said in December that Facebook (now known as Meta), Twitter, and Microsoft had committed to requiring that potential advertisers of financial services be authorized by the UK’s Financial Conduct Authority. The commitment followed similar steps taken by Google, TikTok, and Amazon.
The report noted, however, that there was no set timeline for those changes and that other major online platforms have not followed suit.
Online fraud has risen sharply in the UK in recent years, with an upsurge during the Covid-19 pandemic. Reuters reported in October that Britain has become a global epicenter for bank scams, with a record £754 million ($1.38 billion) stolen in the first six months of last year, up 30% on the same period in 2020. British banks have signed up for a voluntary code to reimburse fraud victims who do enough to protect themselves.
