Biden’s ‘Great Leap Forward’ Will Encounter an Impassable Barrier

April 7, 2021 Updated: April 13, 2021

Commentary

Joe Biden assumed a gentle image in his 40-year plus political career. However, within the first three months as U.S. President, he has proposed an expensive and revolutionary plan.

He not only issued nearly 60 executive orders to realize the many dreams the Democrats have had for years, such as gender diversity, legalization of marijuana, green energy programs, opening the border to illegal immigrants, and reparations for black Americans, but also launched three gigantic economic stimulus plans totaling more than $6 trillion.

Back in the late 1950s, Mao Zedong initiated the “Great Leap Forward” campaign in China, ordering the entire country to “dash to communism.” The Biden administration has now demonstrated a similar “let your imagination run wild” impetus. Even China’s 5 trillion yuan ($767 billion) stimulus in 2009 seemed paltry compared to Biden’s plan.

Build Infrastructure and Reshape the Economy

Biden touted his stimulus program as a “once-in-a-generation investment in America” that includes three projects. First, the $1.9 trillion American Rescue Plan, with most of the money going to Democrat-controlled states. Second, a $2.3 trillion infrastructure plan over the next eight years, focusing on upgrading aging infrastructure such as roads, railways, highways, bridges, and ports, and adding cyber equipment. Third, a $174 billion investment in the electric vehicle market.

stimulus check
A stimulus check issued by the IRS to help combat the adverse economic effects of the COVID-19 outbreak, in San Antonio, Texas, on April 23, 2020. (Eric Gay/AP Photo)

In addition, Biden will release an additional economic proposal in April that adds another $2 trillion to the stimulus packages.

Where will the money come from? Biden’s approach is straightforward: corporate taxes will be increased to finance proposed government spending.

Like leftist governments around the world, the Democrats are in power to freely spend money and enjoy dividing up the pie, but they seldom think about where the money will come from. They have only three sources: increase taxes, print money, and incur debt.

Business Community Angered by Tax Increases

According to various media reports, Biden proposed a corporate tax-rate increase from 21 percent to 28 percent for a period of 15 years, along with closing multinational tax avoidance loopholes by upping the global minimum tax.

Progressive Democrats are thrilled with the plans. Rep. Alexandria Ocasio-Cortez (D-N.Y.) praised Biden’s economic stimulus plan as a good start, saying, “We need to go way higher.”

However, Republicans are displeased. Senate Minority Leader Mitch McConnell (R-Ky.) and others expressed their opposition. Multinational companies that have fully supported Biden’s presidential campaign, including the U.S. Chamber of Commerce, which voluntarily approached nonprofit group Protect Democracy a week before the 2020 election day to propose a joint statement in support of Biden, are now restless and ready to launch strong lobbying against Biden’s bill.

The Washington Post, which has always supported Biden and the Democratic Party, published an article on April 1, titled, “Democrats, Republicans and Businesses Gird for Battle Over Biden’s Proposed Tax Hikes.”

Bloomberg’s March 31 article, “Biden Infrastructure Plan Faces Tougher Slog in Congress Than His Stimulus Bill,” enumerated various voices opposing the tax hikes.

Printing Money and Issuing Bonds

Due to the COVID-19 pandemic, countries around the world were printing money and borrowing in 2020 to see them through the difficult time. In the United States, the Federal Reserve printed $3 trillion. According to data released by the Federal Reserve, the U.S. currency increase in 2020 was about $11 trillion, with newly printed money accounting for 34 percent of all U.S. currency.

Currently, President Biden wants to launch an economic stimulus plan larger than any seen in U.S. history. It will require a total of $6.2 trillion (adding up the three programs: $1.9 trillion + $2.3 trillion + $2 trillion). It is impossible for the U.S. dollar to not depreciate, as the U.S. government will have to rely on printing money and borrowing money.

Printing money is certainly risky, so the U.S. government must think about issuing Treasury bonds. By definition, the national debt is the debt issued by the U.S. Department of Treasury on behalf of the federal government. It falls into two categories: intragovernmental holdings and debt held by the public. According to data from the U.S. Department of Treasury, foreign governments hold about a third of the public debt, while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and savings bonds.

US Treasury Bonds Become Less Attractive

As of March 1, U.S. national debt exceeded $28 trillion, which is about 30 percent higher than the country’s GDP. On average, the debt for each American family is about $280,000 and per capita is about $85,000.

Epoch Times Photo
The National Debt Clock in midtown Manhattan, New York, on Feb. 11, 2020. (Chung I Ho/The Epoch Times)

The National Debt Clock on Sixth Avenue in Manhattan, New York, gives real-time updates on the size of the gross U.S. national debt, making it easy for local residents to know the situation.

Some experts have estimated that after Biden’s four-year term, the national debt will top at least $7 trillion, exceeding the $5 trillion debt left by the Obama administration.

The attractiveness of owning U.S. debt is starting to decline. According to a report released by the U.S. Department of Treasury on Feb. 16, in the past 33 months, net selling of U.S. debt by foreign central banks occurred in 25 months, and the sell-off reached approximately $1 trillion—a record amount. At the same time, 29 foreign government holders of U.S. national debt, including Japan, Germany, India, Russia, the UK, France, and Canada, reduced their holdings to varying degrees. Russia topped the list as it dumped more than 90 percent of its holdings of U.S. treasury bonds.

Now it’s difficult to find buyers for new bonds. The latest 10-year and 2-year U.S. Treasury bonds worth $100 billion have seen sluggish demand at recent auctions.

In order to solve these problems, U.S. Treasury Secretary Janet Yellen said on Feb. 23 that although the market for 100-year bonds is “very tiny,” it is still something her agency “could look at again.” She even suggested that traditional metrics in assessing debt, such as debt-to-GDP ratio, could be replaced with what she called a “more important metric”—interest payments on federal debt as a share of GDP.

The U.S. 10-year treasury bond yield has always been the pricing reference for global risky assets. Even those who believe that the risk of globalization is extremely low regard high treasury yields as the biggest risk in globalization. Unfortunately, in recent months, the U.S. 10-year treasury bond yield has continued to rise—equivalent to an interest rate hike by the Federal Reserve—and topped 1.7 percent in late March. The critical point set by most U.S. asset appraisers is 1.5 percent, with a couple of exceptions: Citigroup set it at 1.7 percent, and JP Morgan Chase adjusted it to 2 percent.

US Treasury Bonds Entered an Internal Cycle

Data shows that U.S. bonds are now less attractive to foreign buyers. The current total debt on the Fed’s balance sheet is $7.34 trillion; but as of Dec. 16, 2020, the Fed’s holding of U.S. debt (except corporate bonds and MBS) was $4.66 trillion. Thus, the Fed’s holdings of the U.S. treasuries exceed the total holdings by major foreign government holders, indicating that U.S. treasuries have entered the mode of “internal circulation and internal debt”—in other words, the United States is losing international buyers for its treasury bonds.

In the past, global purchases of U.S. bonds used to predominate, and they helped to dilute inflationary pressures in the United States. The increasing internal circulation of U.S. treasury bonds will surely make people question whether the status of the U.S. financial market is slowly weakening, and how long the dollar hegemony can last.

When launching the “Great Leap Forward,” Mao Zedong touted the spirit of “how much you will harvest depends on how bold you are!” Progressive Democrats have this same bold spirit. They don’t hesitate to spend more money, as if the money needed when a bill is passed by Congress will just roll in.

For Biden’s $6.2 trillion stimulus program, House Speaker Nancy Pelosi (D-Calif.) and others are focusing on procedures, trying to find ways to split bigger projects into smaller ones and into phases to facilitate funding. But they haven’t thought about the difficulties Treasury Secretary Yellen will encounter to raise the money. Under increasing debt pressure, it would be challenging for the United States to entice foreign buyers. If foreign buyers don’t reenter the market on a large scale, the Democrats will have to deal with inflation and the depreciation of U.S. currency.

In short, Biden’s goal is very ambitious, and the desire of progressive Democrats to spend money is even stronger. But they are completely wrong when they think it’s the Republican Party that’s in the way of Biden realizing his self-proclaimed “once-in-a-generation” dream.

In fact, the impassable barrier for Biden’s dream is not the Republicans nor the business people who have supported him but now oppose tax increases, it’s the unparalleled national debt. And on top of that, the gigantic economic stimulus program is certainly a gamble.

He Qinglian is a prominent Chinese author and economist. Currently based in the United States, she authored “China’s Pitfalls,” which concerns corruption in China’s economic reform of the 1990s, and “The Fog of Censorship: Media Control in China,” which addresses the manipulation and restriction of the press. She regularly writes on contemporary Chinese social and economic issues.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.