Biden’s 2022 budget will increase debt without increasing inflation

“The recent inflation we’ve seen is going to be temporary, not endemic,” Yellen said in response to numerous questions about inflationary pressures from Republican lawmakers.

The chief of the Treasury explained that supply bottlenecks and shortages of materials are helping to drive inflation data, along with a recovery from very low measurements during the COVID-19 pandemic. “I hope that it will continue for several more months and that we will witness high annual inflation rates by the end of this year.”

Yellen said Biden’s fiscal budget request for 2022, released on Friday, will increase the federal debt-to-GDP ratio over the next decade above its current level of around 100%, a figure driven by spending on aid for the pandemic. However, he underestimated that increase.

Analysts expect the budget plan to include trillions of dollars in spending on infrastructure, childcare and other public works, including Biden’s past taxes and spending proposals.

Yellen said the federal government’s ability to pay interest on debt was a more important measure, adding that the real interest burden at this time is currently negative because long-term Treasury yields are low at 1.6%. %.

Jessica Roldan, director of economic analysis at Finamex Casa de Bolsa, said in April that the United States is a risk-free economy, which means that “there will always be people willing to buy and finance this debt.”

Another positive factor for the world’s largest economy relates to the low level of the benchmark interest rate, which prefers that contracted debt does not have inflationary effects. As Carlos Serrano, BBVA’s chief economist, noted in April: “If the country puts debt at a better rate than it expects to grow, we will talk about sustainable debt pathways.”

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“We will have a temporary spending period as well, and some of these increases, which go beyond the budget window, will lead to a decrease in the deficit and increase tax revenues to support this spending. I think it is a financially responsible program,” he said.

He added that the investments would increase the supply capacity of the economy and allow faster growth in the coming years without inflation.

With information from Reuters