Think Deficits Are Bad Now? You Ain’t Seen Nothin’ Yet

The U.S. government was on track for a $1 trillion deficit this fiscal year, even before coronavirus. That’s the kind of budget deficits one would expect to see during a major economic downturn. The federal government has only run deficits over $1 trillion in four fiscal years, all during the Great Recession. The U.S. was on that path before the recent coronavirus economic upheaval even while Trump called “the greatest economy in the history of America.”

And now it looks like the U.S. is on the cusp of a legitimate economic crisis.

That raises a question with only ugly answers: if deficits are this bad now, what is it going to look like when coronavirus spending starts to come through the pipeline? As Peter Schiff said in a recent podcast, “They’re talking about loan guarantees for everybody. How is the government that’s the world’s biggest debtor going to guarantee anybody else’s debt?”

This raises another question: how will the growing deficits impact the bond markets?

There are only two ways to get the money for all this spending – tax it or borrow it. Trump is talking tax cuts, so that leaves borrowing. That means the Treasury Department will need to sell billions of dollars in bonds.

But there are already cracks int he bond market.

Investors poured into U.S Treasuries as a safe-haven as the coronavirus crisis grew. Interest rates plunged, with the yield on the 10-year Treasury dipping to record lows below 0.5 percent. At some point, the demand for bonds will ebb, but the supply certainly won’t. In fact, the supply will increase as the Treasury issues new bonds to pay for the new spending.

Then what?

In fact, the bond bubble may have already popped with Trump’s promise of government stimulus. This could foreshadow rising interest rates – a nightmare for a government trying to run on borrowed money.

The existence of a crisis doesn’t change fundamental economics. The national debt is still a problem. It still has to be paid back. And government debt still retards economic growth.

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3 thoughts on “Think Deficits Are Bad Now? You Ain’t Seen Nothin’ Yet

  1. Government budgeting had already been turned into getting the game going as long as there are willing players.
    We are no more working with money but with vouchers like in previously failed communist states.

    Like

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