US: The federal government possesses significant fiscal ammunition – Wells Fargo
On Tuesday, US Treasury Secretary Mnuchin said President Trump supported the idea of sending direct cash payments to Americans in the very short-term, among other measures of an economic stimulus package. Analysts at Wells Fargo, suspect a sizable fiscal stimulus is in the offing, but they warn the ultimate scope and design remain incredibly unclear.
“As Congress moves to Phase III, we believe sizable stimulus is what comes next. Treasury Secretary Mnuchin has reportedly requested $850 billion to combat the economic effects of the virus. Were this request to be met, it would amount to about 4% of U.S. GDP. For context, the stimulus bill passed in February 2009 was about 5.5% of U.S. GDP. Given how rapidly the economic situation is deteriorating, it would not surprise us if the $850 billion number quickly grows, probably to north of $1 trillion.”
“We expected the federal budget deficit this year to be about $1 trillion before COVID-19 entered the picture. But even this 10% of GDP figure probably does not represent the true upper bound on federal borrowing. During World War II, the federal budget deficit peaked at nearly 30% of GDP in 1943, and was more than 20% each year in the 1943-1945 period. A federal budget deficit of 30% of GDP today would amount to nearly $7 trillion.”
“Financing these deficits required extraordinary efforts, such as sizable war bond programs directed at the public and direct coordination between the Treasury and the Federal Reserve. And while we doubt the fiscal response will be anything quite that big, we highlight this to remind readers that the federal government possesses significant fiscal ammunition, particularly at a time when real interest rates on Treasury securities remain negative.”