Borrowing our way into oblivion

WASHINGTON — The government and big corporations are plunging our economy into trillions of dollars of debt to deal with the costs of the coronavirus pandemic.

The U.S. Treasury will borrow $4 trillion more than it collects in tax revenues, according to budget officials — the highest debt levels since 1945.

“Corporate borrowing is also setting debt records to cover the costs of declining business profits. Businesses such as Exxonmobil ... which binged on debt over the past decade, now are exhausting their credit lines and tapping bondholders for even more funding,” The Washington Post reported this week.

“To support such borrowing, the Federal Reserve has dropped interest rates to zero and added more than $2 trillion of loans to its portfolio in the past six weeks — as much as in the four years following the Great Recession,” the Post reported.

Economists disagree about what the impact of the high levels of debt will be as the economy struggles to regain its strength.

“High debt loads already are straining many corporations, which may be forced to choose between skipping loan payments and laying off workers. Millions of consumers, too, face sizable monthly bills for student loans and credit cards, a burden that could weigh on any economic rebound,” the Post said.

The paper further noted, “Treasury Secretary Steven Mnuchin said last month that the government must spend freely to help workers and businesses hurt by official shutdown edicts. ‘Interest rates are incredibly low, so there’s very little cost of borrowing this money,’ he told reporters. ‘In different times, we’ll fix the deficit. This is not the time to worry about it.’” But others are worried about the rising debt. “We should be very worried,” said Atif Mian, an economics professor at Princeton University who has written frequently about this issue.

“We are talking about a level of debt that would certainly be unprecedented in modern history or in history, period. We are definitely at a tipping point,” he told the Post.

“Still,” writes Post reporter David J. Lynch, “for four decades, the U.S. economy has grown steadily more addicted to borrowed money. Total government, business and household debt now exceeds 250% of annual output, three-quarters greater than in 1980, according to government statistics.”

But Mian, the author of “House of Debt,” which examined the role of household debt in the 20082009 financial crisis, the U.S. debt burden will reshape the economy in subtle but powerful ways.

“The number of companies in danger of having their credit rating lowered is at a 10-year high, according to S&P Global Ratings,” Lynch writes.

“For now, Americans — American consumers, whose borrowing played such a critical role in the 2008 crisis — have mostly been affected by job losses, furloughs and wage cuts, not debt,” Lynch states. “While household debt hit a record $16.1 trillion last year, it remains much smaller relative to the economy than in 2008.”

Tomasz Piskorski at the Columbia Business School adds, “Congress has granted some mortgage relief, and Trump has suspended student loan payments for most borrowers through Sept. 30. But that won’t be enough to avoid to avoid a debt-driven economic spiral.”

Piskorski adds, “In a few months, the recovery will not be there,” he says. “And these households will be saddled with very high debts, and they won’t have jobs, and they will start to default.”