The U.S. Treasury Department on Friday said the budget deficit soared to a record high of $3 trillion through the first 11 months of this financial year. The announcement came just days after China indicated it may dump American treasuries if tensions between Washington and Beijing continued to escalate.
The deficit between October and August, worsened by coronavirus relief spending, more than doubles the previous all-time high shortfall of $1.37 trillion set in 2009. During that 11-month period, the federal government sunk large sums to generate movement out of the 2008 financial crisis and ensuing Great Recession.
More than $6 trillion has been spent this financial year—nearly $3 trillion on COVID relief—a figure double the $3 trillion generated from taxes. The imbalance is enormous compared to last year’s $984 billion. And with the budget year ending on September 30, the Congressional Budget Office forecasts that the deficit will increase to $3.3 trillion. With that, America’s debt will likely soon eclipse $26 trillion.
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U.S. Budget Deficit Hits Highest Level Since 2012 In Donald Trump’s First Fiscal Year
To make matters worse, China has threatened to dump its U.S. treasuries.
Beijing began diversifying its U.S. Treasury securities holdings in 2013—at a peak of $1.32 trillion. Now at $1 trillion, it’s still America’s second highest, following Japan’s roughly $1.2 trillion.
Last week, the Global Times—a newspaper owned by the People’s Daily, an official publication of the Chinese Communist Party (CCP)—said Beijing may further reduce its holdings to around $800 billion as America’s “federal deficit increases default risks and the Trump administration continues its blistering attack on China.”
Economists in the Global Times article implied that the withdrawal could be accelerated if Washington imposes further sanctions on Beijing or Trump ramps up his escalating rhetoric against the Asian nation, whom he blames for the pandemic.
A quick discharge of $200 billion U.S. securities would upend global financial markets and trigger domestic interest rates to rise. But, Chinese state media often makes signaling threats that the CCP aren’t bound by.
Shaun Breslin, a professor of politics and international studies at the University of Warwick in the U.K., told Newsweek that such a move “would have so many detrimental impacts on China as well, not least massively reducing the value of anything that they had left.”
Newsweek reached out to the U.S. Treasury Department for comment.
U.S. Central Bank Chair Jerome Powell told Washington in June that while this year’s spending is certainly “unsustainable,” we shouldn’t focus on reducing the deficit given the current pandemic.
Lawmakers in Congress are still deadlocked over another stimulus package that would give Americans much-needed direct payments, further unemployment benefits and aid for small businesses. Republicans proposed a modest $500 billion “skinny” bill this week, which was quickly blocked by Democrats seeking trillions more.
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