The US government is addicted to spending money. And the Federal Reserve is Washington DC’s pusher.
When we talk about inflation, we usually focus on money creation by the Fed. After all, that is the definition of inflation. But the Fed has to keep creating money in order to monetize the massive federal deficit. And until Uncle Sam gets his spending problem under control, inflation will never truly abate.
There is no sign the US government is going to get its spending problem under control. Last month, the feds ran the second-largest July budget deficit in history.
Meanwhile, Congres just pushed through another massive spending bill.
With government tax revenue at elevated levels and pandemic-related spending programs winding down, the Biden administration has managed to paper over its spending problem. But in July, tax receipts dropped and the deficit ballooned to $211.05 billion, according to the latest Monthly Treasury Statement. That’s the second-largest monthly deficit of fiscal 2022.
Adding in July’s big number, the fiscal year deficit surged to $726.12 billion with two months left.
Government receipts dropped to $269.34 billion last month. That was the lowest revenue level of the fiscal year. July notwithstanding, far this year, the US government has been rolling in the dough, taking in just over $4 trillion. Government receipts have already eclipsed last year’s total with two months left.
Unfortunately for the federal government, the CBO expects this revenue surge to wane.
Individual income tax receipts are projected to decline as a share of GDP over the next few years because of the expected dissipation of some of the factors that caused their recent surge. For example, realizations of capital gains (profits from selling assets that have appreciated) are projected to decline from the high levels of the past two years to a more typical level relative to GDP. Subsequently, from 2025 to 2027, individual income tax receipts are projected to rise sharply because of changes to tax rules set to occur at the end of calendar year 2025. After 2027, those receipts remain at or slightly below the 2027 level relative to GDP.”
As the economy spins deeper into a recession as the Fed tightens monetary policy to fight raging inflation, you can expect revenue to tank further, meaning even bigger budget shortfalls.
Spending is not about to wane. The US government has spent money at roughly a half-billion per month clip all year.
In July, total outlays totaled $480.39 billion. This brought total spending for fiscal 2022 to just over $4.83 trillion.
Despite this absurd level of spending and the massive deficit, the mainstream continues to point to the “shrinking” deficit as good news. Reuters highlighted the “30% drop from the $302 billion deficit reported in the same month last year.” But this only looks good in comparison to a 2021 budget that was still bloated by pandemic spending programs. As those have fallen off the books, the deficit has shrunk. But it remains at historically high levels. It’s like flood waters receding so they no longer fill the second floor of your house. That’s great. But the first floor is still flooded.
It appears the deficit will come in close to $1 trillion. Prior to the pandemic, the US government had only run deficits over $1 trillion four times — all in the aftermath of the 2008 financial crisis. Trump almost hit the $1 trillion mark in 2019 and was on pace to run a trillion-dollar deficit prior to the pandemic. The economic catastrophe caused by the government’s response to COVID-19 gave policymakers an excuse to spend with no questions asked. Now it appears the government is settling back into the status-quo – running ’08 financial crisis-like deficits every single year.
That’s a big problem for the Federal Reserve. Central bankers at the Fed continue to insist they will stay in this inflation fight until the end. But Uncle Sam depends on the Fed buying Treasury bonds in order to facilitate its borrowing addiction. As the central bank buys bonds, it creates artificial demand and holds interest rates down. Without the Fed’s big fat thumb on the bond market, Treasury prices will continue to sink as supply outstrips demand, and interest rates will rise.
This raises the government’s borrowing cost. The Fed hiking cycle has already brought the weighted average interest rate the government pays on the debt up from 1.3% to 1.53%. Twenty-three basis points may not sound like much, but on a $30.6 trillion balance, that comes out to $70 billion.
Something has to give. The Fed can’t simultaneously fight inflation and serve as Uncle Sam’s drug dealer. Either the government will have to cut spending or the Fed will have to keep creating money out of thin air in order to monetize the debt. You can decide for yourself which scenario you find more likely.
The national debt currently stands at $30.7 trillion. The Treasury increased the total debt by $27 billion in June alone.
According to the National Debt Clock, the debt to GDP ratio is 123.48%. Despite the lack of concern in the mainstream, debt has consequences. More government debt means less economic growth. Studies have shown that a debt to GDP ratio of over 90% retards economic growth by about 30%. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC.
To put the debt into perspective, every American citizen would have to write a check for $92,035 in order to pay off the national debt.