In 2020 and 2021, the Federal deficit is projected at 5.5 trillion USD. However, 1.5 trillion is consistent with the Federal Reserve's target. The other 4.0 trillion needs to be dealt with outside of normal monetary activities. The U.S. economy will be dramatically affected by the added debt, but how it will be affected will be determined by both fiscal and monetary policy decisions.

M2 is currently around 19.5 trillion. If it was increased by the whole 4.0 trillion through monetization or 'quantitative easing'(commonly referred to as 'printing money'), it would result in an additional 4.0/19.5 ~ 20% inflation, over and above the Fed's 2% target. If it was incurred over two years, it would result in 12% inflation per year. The U.S. would survive that, though it would undoubtedly shake confidence in the dollar. To clarify, the Federal Reserve undertakes QE by buying Treasury debt with newly created money.

On the other hand, if the Treasury auctioned debt to domestic lenders only, yields would go way up but it would not create inflation. It would push up interest rates, since the Treasury would need to incentivize the purchase. In order to do so, investors would need to liquidate other positions and thus would reduce market valuations, primarily of stocks and bonds, but likely also gold and perhaps crypto. As investors liquidated some of their positions to fund their treasury buy, those investments could be pushed into a bear market territory from which they may not easily recover.

Third, Treasuries could be purchased internationally. Like private domestic purchasers, substantial international funding would require a substantially higher yield. This, also, will push interest rates higher. While counter intuitive to most people, large International treasury purchases will actually strengthen the dollar. That is because the purchases will be in dollars and they will reduce the supply of USD in forex markets. With increasing oil prices, demand could also increase. In fact, rising oil prices is likely part of the explanation for the recent strength of the dollar.

An important factor is that increasing treasury yields could increase federal interest expense and therefore future deficits. The scope will likely be insufficient to cause a fiscal death spiral. To explain, increasing interest rates creates increased deficits (unless it is financed through QE) which increases the amount of Treasuries sold which increase interest rates, which increases deficits, etc. Still, rising interest rates is certainly a downside to current policy decisions that created the additional 4.0 trillion USD of deficits..

Lastly, the 4.0 trillion could be reduced through tax increases. However, the Laffer Curve probably limits this as a useful action. To clarify, Arthur Laffer claimed that lower tax rates decrease government revenue simply from lower rates. However, less intuitive, there is a point where higher tax rates by slower economic growth and increased tax avoidance behavior actually reduces total tax revenue. The Biden Administration has already signaled its interest in a substantial tax increase, so we know that an attempt will be made to finance some of the 4.0 trillion USD in this way.

While fiscal policy will have an effect on how the budget shortfall is financed, it is primarily monetary policy that will determine the ultimate outcome. The Federal reserve will need to decide, after estimating the degree to which increases in tax revenues can cover the shortfall, how much it will finance through QE and how much it will allow to be funded by the marketplace. It can only affect how much is financed domestically and how much internationally by encouraging Congress to change laws to either incentivize or disincentivize either the international or domestic investors.

Financing through tax increases or Q.E. does not increase the Federal debt while Treasuries funded either by domestic or international investors does. So, the claims made in the popular press that the whole of 5.5 trillion is added to the debt are incorrect. We know that the Treasury debt. It will be financed through tax increases and, while no statements have been made thus far, the Fed necessarily will purchase a substantial portion of it. It is likely that the Fed will have resistance to adding more than an additional 2.0 trillion USD to its balance sheet, so it will have a hard ceiling on inflation at about 7%.

I'm not sure how they will do it, but I suspect that Treasury will look for ways to encourage foreign purchase of Treasury debt. The reason is that the increases in interest rates and inflation will depress the value of the dollar, while international purchases will strengthen the dollar.

So, in summary, interest rates and inflation almost certainly will increase. Because of the massive deficit spending, economic growth will increase, however, the increases in tax rates will tend to depress economic growth. Also, the equity and debt markets will likely turn bearish as investments in Treasuries will increase.

Hyper-inflation is not really a risk and, even with China, Iran and Russia attempting to move away from USD as the reserve currency, a collapse in the dollar is not likely. People misunderstand what causes hyper-inflation. It is actually a 'velocity' death spiral. In the U.S., today, velocity is usually around 1.3 to 1.7. It is calculated by dividing GDP by money supply. When velocity increases money supply needs to shrink or inflation will ensue. Unfortunately, historically and to a degree, even today, many currencies do not have an effective way to decrease money supply rapidly. Consequently, rapid increases in velocity will exacerbate inflation.

A velocity of 1.5 means that, on average, any given dollar is spent once every 243 days. If velocity increases to once every 180 days, this will result in inflation of 243/180 = 35%. However, that increase in velocity can happen very quickly, say in 3 months, which creates an annualized rate of inflation of 1.35^4 = 232%. When that level of devaluation of the currency takes place, clearly people will not hold onto their currency for very long. They will be inclined to convert their currency asset into a hard asset almost immediately upon receiving it. So, if velocity increases to a turnover once every 3 days, inflation will be 243/3 = 8,000%. This has happened many times throughout history.

It happens precisely because people lose confidence in the currency. If the Fed states that they expect inflation to increase to 7% for two years and if the public believes them, the velocity induced devaluation death spiral will not be ignited. While there is a substantial community, mostly gold bugs, that loudly proclaims the coming collapse of the dollar, in reality, the likelihood of such a collapse is slight.

Especially, on the Right, there are many pundits proclaiming an imminent collapse of the dollar, hyperinflation and a resultant depression level economic downturn. While this substantial deficit spending, whether needful or not, is hardly a good turn of events, the apocalyptic prognostications can be safely disregarded.