Never before has the US entered an economic downturn with a combined federal, state, and local budget deficit anywhere near 8 per cent of GDP. It is a global accident waiting to happen.

The public accounts should be near balance at this stage of the cycle, years into a long economic expansion. If the US tips into a serious recession from such a depraved starting point, the figure could explode into the mid-teens, regardless of who wins the elections in November.

No matter who ends up in the White House, getting the US economy back on track shapes as a major challenge.Credit: AP

Chronic debt issuance on this scale would strain the world’s appetite for US Treasuries, blunting the ability of the US government to fight a prolonged slump with countercyclical stimulus. It would have powerful knock-on effects through the world’s dollarised financial system, playing havoc with a whole architecture of global credit contracts linked to US debt yields.

“The US has always been special but it is now testing the limits. Everything has held together so far but the last two Treasury auctions have been very weak, and we’re watching it closely,” said Torsten Slok, chief economist at Apollo Global Management.

Fiscal excess was a latent theoretical danger as long as the US economy was booming. It has come into sharper focus after the US recession scare this month. “In a bad economy, tax revenues go down and unemployment benefits go up. That is when you see fiscal risk,” said Slok.

There is no longer any emergency to justify the current scale of wartime borrowing. You could say that industrial and clean-tech rearmament against China has a belligerent flavour. But Ronald Reagan out-armed the Soviet Union and won the Cold War with combined deficits running below 2 per cent of GDP in the late 1980s, and that included 15 aircraft carrier battle groups.

Reagan left office with a gross federal debt of under 50 per cent of GDP. Today it is 122 per cent and going parabolic.

There is much ruin in a great nation but America is........

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