By Mises Institute (emphasis QTR’s)
In May this year, the Congressional Budget Office estimated outstanding US government debt next October to be $27,388 billion. By the end of the first quarter of the fiscal year, it will exceed $34,000 billion. It is soaring out of control, and perhaps it is not surprising that the CBO has not updated its forecasts with this debt uncertainty. The CBO also assumed that debt interest costs last year would be $663 billion, when it ended up being $980 billion 48% higher than forecast. For the current fiscal year, the CBO assumed that the average interest cost on debt held by the public would be only 2.9%. Short-term T-bill financing upon which the Treasury has become overly dependent is almost double that.
Of the total bond debt, some $7.6 trillion has to be refinanced this fiscal year, to which must be added the financing of the budget deficit. Bearing in mind that 2024 is a presidential election year when government spending always increases in an attempt to buy votes, the deficit excluding bond interest is bound to rise from last year’s nearly $1 trillion. And with recessionary forces depressing tax revenue and increasing welfare costs, perhaps we can pencil in an underlying deficit of $1.5 trillion for the current year, to which interest costs must be added.
So far, the US Treasury has not had difficulty in current funding, because at an average rate of over 5.4% since the end of September, T-bills have been draining money market funds out of the Fed’s reverse repo facility. At current discount rates, this probably adds about $150 billion to the government’s interest bill compared with fiscal 2023 so far. The balance of funding requirements for the rest of this year should take the total to about $1.5 trillion, 50% of the total deficit, which in turn at $3 trillion is rising at a 50% annual clip.
With GDP this year estimated by the CBO to be $27,266 billion, it gives a budget deficit to GDP ratio of 11%. That is without factoring in an economic downturn. Together with the estimated $7.6 trillion of maturing debt to be rolled into new debt at higher bond yields this fiscal year, we are looking at a further $3 trillion of deficit to fund, totalling $10.6 trillion. This is miles away from the CBO’s debt estimate of $34,205 billion at the end of the fiscal year. After not three months in, debt is already just $300 billion from that total — it looks like the outturn next September will be closer to $37,500 billion.
Debt funding costs will depend on the marginal collective view of foreigners. Other than offshore funds, such as the Cayman Islands, Ireland, Luxembourg and Switzerland, major holders of the coincidental $7.6 trillion in US government debt such as Japan and China have been net sellers. And of the top twenty holders, seven are arguably categorised as either leaning towards China or threatening to reduce their exposure to US dollar hegemony. On these grounds alone, future foreign participation in US government funding cannot be guaranteed.
In large measure created by debt funding problems, rising interest rates will make this situation even more difficult. For now, there is easy funding available by issuing treasury bills, attracting money market funds out of reverse repos at the Fed. But this sweet spot is rapidly being exhausted. There is the potential for banks to deleverage their risks by dumping private sector exposure in favour of so-called risk free short-term government stock and that is undoubtedly happening. But that intensifies the shortage of credit for cash-flow starved businesses, leading to higher borrowing costs for the private sector if scarce credit is available. And that surely opens up the possibility that down the line the US Government will be forced to step up costly support for failing businesses.
In the process of relying increasingly on short-term funding, the debt maturity profile shortens, so that the costs of rolling over maturing debt rapidly rises. It’s a situation made worse by...(READ THIS FULL ARTICLE HERE).