Debt-funded stimulus may overheat economy, U.S. scholar warns

People with shopping bags walk on a street in Washington, D.C., the United States, March 5, 2021. (Photo by Ting Shen/Xinhua)

CHICAGO, March 10 (Xinhua) -- The recent huge amount of debt-funded stimulus on the U.S. economy is far out of proportion for the economy's need and would result in an overheating of the economy, a U.S. scholar said here in an interview with Xinhua on Wednesday.

"The total U.S. fiscal stimulus has surpassed the gross domestic product (GDP) of Germany, and its last stimulus alone represents nine percent of America's GDP in 2019. That is more than the U.S. economy can absorb productively," said Khairy Tourk, professor of economics with the Stuart School of Business at the Illinois Institute of Technology in Chicago.

"The huge debt-funded stimulus would result in an overheating of the economy, putting pressure on the prices to rise." Tourk said.

However, he admitted that the stimulus may "help feed hungry children", adding that the 1.9-trillion-dollar relief cannot be justified wholly on economic ground. "Most of it could be considered a one-shot social welfare measure to provide assistance to families in need."

"The temporary increase in disposable income will hardly have any effect on stimulating the economy in the long run," he said, warning that with unemployment falling much more rapidly than expected recently, the rapid rebound could be associated with high inflation rates.

The United States has been following an expansionary monetary policy with the Federal Reserve buying treasuries and mortgage-backed securities to the tune of 120 billion dollars a month. In doing that, the Federal Reserve has inadvertently been popping up assets prices, including the stock market and bonds market.

The result is that the 10-year price-earning ratio of Standard & Poor's 500 index has risen to 34.9, much higher than the modern-era average of 19.6. "Bidding up assets prices beyond real value opens the door to market bubbles," he warned.

"Assets inflation makes it difficult to evaluate the financial health of individual companies, as well as the economy as a whole," Tourk stressed.

It is well known that the United States has been living beyond its means, which is reflected in its huge budget deficit. In 2020, U.S. government spending was 6.55 trillion dollars, whereas its revenue was 3.42 trillion dollars. In order to finance its overspending, the United States borrows money from the international market.

"As the U.S. trade deficits keep increasing, this would reduce international confidence in the future value of U.S. dollar," said Tourk, adding that with the rise of Asia, more and more trade transactions are being denominated in other currencies.