Deficit likely to come in just shy of $1 trillion in 2019, latest Treasury figures sh

[HARDCORE]

Deficit likely to come in just shy of $1 trillion in 2019, latest Treasury figures show

By Robert Romano

With just two months remaining in fiscal year 2019, come Sept. 30, the U.S. budget deficit appears likely to come in just shy of $1 trillion, the latest data from the U.S. Treasury shows.

From October through July, the deficit has already come in at $866.8 billion. The U.S. budget deficit has not topped $1 trillion since 2012.

To get to $1 trillion for the year, the government would need a net deficit of a little more than $133 billion, but it has averaged only $44.7 billion in the months of August and September the past three years. It could still happen, but usually the federal government runs a surplus in September as the government tends to receive substantial corporate and income tax payments that month.

Even then, a budget deficit of $900 billion or so is nothing to sneeze at.

In fact, the national debt, now more than $22.3 trillion (a quarter of that is held by government trust funds), grew by almost $1.5 trillion in 2018 as spending in Washington, D.C. continues to outpace the growth of the economy and revenues.

Since 1980, the debt has grown on average 8.8 percent every fiscal year, but during that same period, the U.S. economy has only averaged 5.4 percent nominal growth before adjusting for inflation.

As a result, the debt is now 105 percent of the economy. And if those trends were to continue, the debt will top $100 trillion in 2037, and exceed 193 percent debt to GDP.

Even if the debt only grew by 7 percent, as it did last year, that still would grow the debt to more than $78 trillion by 2037.

What does that look like? Just ask Japan, whose economy has barely grown nominally in 20 years amid a declining population. It has a $10.5 trillion debt and just a $5.2 trillion Gross Domestic Product, a more than 200 percent debt to GDP ratio.

These jaw-dropping numbers should be enough to give any member of Congress pause as they consider votes on this year’s appropriations bill. Even so, many will doubt that the numbers matters that much. So, who’s right?

The question is whether these debt loads are sustainable or not over the long term. Will the dollar still be the world’s reserve currency by then? Will the dollar remain strong relative to other currencies? Will there still be such demand for U.S. treasuries on global financial markets? Will we still be running $870 billion plus trade deficits annually? Will we experience another baby boom?

Perhaps the most critical factor to consider — since it captures the outcome of these other questions—is whether the economy will really grow at 5.4 percent nominally, a number which definitely relies on the booms of the 1980s and 1990s. Since 2000, nominally — that is, before adjusting for inflation — the economy has only averaged about 4 percent growth.

Meaning, there are scenarios where spending — much of which is baked into the cake of Social Security, Medicare, Medicaid, etc. — continues to increase substantially but the economy does not robustly grow at all, ala Japan. I certainly can foresee and worry about those scenarios.

On the other hand, there are other scenarios where one can forecast major economic growth, for example, if major production is restored to the U.S. from overseas, we do get a baby boom, trade deficits are reduced and more money is invested in building this country. In terms of bringing overseas production back to the U.S., that is certainly a major part of the economic vision President Donald Trump laid out for the American people in 2016.

With robust economic growth, then it’s a future where you also see substantial increases in revenue because you’re dealing with a larger pie, and so balancing the budget does not seem so insurmountable.

The bright side is nothing is set in stone yet, but almost all of the solutions I can conceive of all involve restoring strong growth to the U.S. economy. Revenues are rising compared to last year, $2.86 trillion from October to July, compared to $2.77 trillion at the same point last year. The trouble is spending is increasing much, much faster, with $3.73 trillion through the first 10 months of the fiscal year, compared with $3.45 trillion last year.

In terms of spending cuts, the sad truth is there is almost no will in Washington, D.C. to pare back the budget. The budget President Donald Trump and the Office of Management and Budget proposed would cut overall spending by $2.7 trillion over 10 years and bring the budget towards balance within 15 years. Unfortunately, Congress has not adopted many of the proposals in that budget.

When we did get budget sequestration in 2011 after the debt ceiling standoff between former President Barack Obama and Congressional Republicans, it essentially froze domestic, discretionary spending for a few years, and the deficit was reduced. So-called mandatory spending was never addressed because nobody wants to propose either cutting Social Security and Medicare benefits or raising payroll taxes. Even with sequestration, the lowest the deficit got was $441 billion in 2015. That’s still really, really large.

Here we are in 2019, at full employment, the economy’s doing okay, and all Congress had to do was take its foot slightly off the brakes and suddenly we’re nearly going to hit $1 trillion on the deficit. By the end of fiscal year 2020, we may very well cross that threshold again.

What do we suppose will happen the next time we have another recession? What if it’s a big recession like in 2008 and 2009? Then, deficits likely will become much, much greater as revenues take a hit.

Again, nothing is set in stone. I tend to think optimistically about the future because I do not think running perpetual trade deficits like we have was ever going to be sustainable. If the American people hadn’t voted for Donald Trump in 2016, they would have had to invent him. Eventually, policymakers were going to figure out that we could grow the economy here and we’d all be better off for it, revenues would grow and nobody would worry about the debt. It may be that Trump, whether he wins or loses his reelection bid in 2020, has already set us on that path. I certainly hope so.

Robert Romano is the Vice President of Public Policy at Americans for Limited Government.

[Boats]

Another report like the one HC just posted
A $1 trillion US budget deficit is one big reason the Fed may have to cut rates
By: Jeff Cox CNBC 8-13-19
RE: https://www.cnbc.com/2019/08/13/a-1-...cut-rates.html

KEY POINTS:

* The recent debt deal between the White House and Congress virtually guarantees trillion-dollar deficits well into the future.

* A Credit Suisse analyst says that if the Fed doesn’t cut interest rates, markets could be disrupted by the big influx of debt.

* Taxpayers have shelled out nearly half a trillion dollars already this year for debt servicing costs.

If low inflation, a wobbly economy and tariff jitters weren’t enough to push the Federal Reserve to lower interest rates, there’s also the simple reason of the swelling national debt.

The recent debt deal struck between the White House and Congress virtually guarantees trillion-dollar deficits well into the future as well as continued acceleration of the government’s collective IOU, which is now at $22.3 trillion.

Trying to finance all that red ink is going to be tricky. Investors will need to be willing to sop up all that paper, and may want a little extra yield for doing so.

With all that in mind, the Fed could have no choice but to lower rates, unless it wants to go back to buying Treasurys itself.

The supply of debt coming to market will lead to “acute funding stresses,” Credit Suisse managing director Zoltan Pozsar said in a note. He called the situation a ”‘fiscal dominance’ of money markets” and warned of the consequences of an inverted yield curve, where the fed funds rate sits well above the benchmark 10-year Treasury note yield.

“Absent a technical bazooka, stresses will leave one option left: more rate cuts,” he said. Reductions in the benchmark overnight funds rate will need to be “aggressive enough to re-steepen the Treasury curve such that dealer inventories can clear and inventories don’t drive funding market stresses.”

“The curve remains deeply inverted relative to actual funding costs that matter; dealer inventories are at a record; and banks that fund dealer inventories are at their intraday liquidity limits,” he added. “Supply won’t be well received given the inversion.”

Markets already expect the Fed to cut rates after July’s 25 basis point reduction, the first time that had been done in nearly 11 years. Popular reasons for the cut are concerns that the global economic slowdown will infect the U.S., the persistently low inflation that policymakers fear has held back living standards, and the ongoing tariff war with China.

What seldom gets mentioned is just how much pressure the government debt situation exerts, particularly with the Fed deciding to exit the bond market.

The taxpayers’ tab

Credit Suisse estimates that the Treasury Department will issue $800 billion in new debt before the end of the year and increase its cash balance by $200 billion, or more than double the current $167 billion.

Over at the Fed, the central bank just ended a program in which it was reducing the bonds it was holding on its balance sheet by allowing some proceeds to roll off each month. Pozsar called the end of this so-called quantitative tightening “a nice gesture, but not a solution.”

The most feasible solution to alleviate market pressures, he said, is a rate cut.

“We recognize that the Fed doesn’t bend to the circumstances of dealers and carry traders, but we’d also note that we never had this much Treasury supply during a curve inversion on top of record inventories with leverage constraints!” Pozsar wrote.

Taxpayers, of course, are on the hook to those buying the government’s debt.

Servicing costs for the dent in the current fiscal year are just shy of half a trillion dollars — $497.2 billion through July — and certain to pass 2018′s record $523 billion. Over the past decade’s debt explosion, taxpayers have shelled out $4.4 trillion in financing costs.

President Donald Trump has repeatedly pressed the Fed for more rate cuts and an end to quantitative tightening, citing the competitive disadvantage the U.S. has with other global economies where central banks have loosened.

Should the Fed not deliver, Pozsar said there would be troublesome market results. He said the funds rate could end up printing outside the 2% to 2.25% range where Fed targets the benchmark, and there likely would be stresses in the international overnight markets that could be tantamount to another hike.