“With deficits already elevated, future downturns will likely push them to historically high levels, potentially ~10% in the US. This may constrain active fiscal easing during recessions, shifting more burden to central banks. In the decade before the pandemic, fiscal space was ample and monetary policy space limited; now, fiscal space is limited and monetary policy space ample.
- We outline five scenarios for US debt, unchanged from last year. In the baseline, debt continues to rise but credibility remains intact given loose Laffer Curve constraints and the dollar’s continued (albeit perhaps dented) reserve status. Tail risks – a debt crisis or financial repression – have increased under Trump but remain unlikely.
- Some form of fiscal consolidation is likely beyond the Secular horizon. While political willingness for that is currently low, the interest burden is rising sharply and may change attitudes over time – as in previous episodes of significant fiscal consolidations in the US.”
Morten W. Langer
