Contact us
CALL US NOW 1-888-GOLD-160

Big Spending Bill Is a Big Problem for the Fed’s Inflation Fight

  by    0   3

Just before Christmas, Congress passed a massive omnibus spending bill. This is yet another blow to the Federal Reserve’s feckless fight against inflation.

The $1.7 trillion bill will fund government operations for the remainder of fiscal 2023. It includes some $800 billion in domestic spending, a 9.3% increase over fiscal 2022. It also includes $858 billion in military spending, a 10% increase over last year’s levels.

Overall, the omnibus bill authorized about $1.5 billion more than last year’s budget.

“Yes, indeed the goose is getting fat—we have a big bill here because we had big needs for our country,” House Speaker Nancy Pelosi said.

Of course, this is only one component of federal expenditures. In March 2021, Congress approved $1.9 trillion in spending to address the pandemic, and earlier this year, it passed the euphemistically named “Inflation Reduction Act.” All of that spending will pile on top of this most recent allocation of funding.

Of course, all of this spending will only increase inflation.

And it’s a big problem for the Federal Reserve as it attempts to stem the tide of rising prices.

In fact, it is impossible for the central bank to get a handle on inflation when the government keeps running bigger and bigger deficits that can only be sustained by more inflation.

The Fed’s Problem

The Federal Reserve has primarily relied on interest rate cuts to battle inflation. But it can’t slay the inflation dragon with monetary policy alone. A paper published by the Kansas City Federal Reserve Bank even acknowledged that fact. In a nutshell, the authors argue that the Fed can’t control inflation alone. US government fiscal policy contributes to inflationary pressure and makes it impossible for the Fed to do its job.

Trend inflation is fully controlled by the monetary authority only when public debt can be successfully stabilized by credible future fiscal plans. When the fiscal authority is not perceived as fully responsible for covering the existing fiscal imbalances, the private sector expects that inflation will rise to ensure sustainability of national debt. As a result, a large fiscal imbalance combined with a weakening fiscal credibility may lead trend inflation to drift away from the long-run target chosen by the monetary authority.” [Emphasis added]

And why does the private sector expect more inflation in order to sustain the debt? Because ultimately the central bank has to monetize that debt. That means money printing in order to buy US debt. Without the Fed intervening in the bond market, the US Treasury cannot sell enough bonds with a low enough interest rate to keep the borrowing and spending going.

Even with pandemic-era spending winding down, the US government ran a $1.38 trillion budget deficit in fiscal 2022. This despite government receipts at near-record levels. Revenues are expected to decline in the months ahead and spending clearly isn’t coming down. That means bigger deficits. And bigger deficits mean more borrowing.

The Federal Reserve enables the US government’s borrowing and spending spree. During the pandemic, the Fed bought trillions in US Treasury bonds. This artificial demand kept bond prices higher than they otherwise would have been and interest rates lower. Without the Fed’s big fat thumb on the bond market, all of the borrowing would have driven interest rates to unsustainable levels.

But in order to fight inflation, the Fed has to shrink its balance sheet. That means it is no longer buying bonds. This is a huge problem for the US Treasury as it tries to find willing buyers for its debt.

On the other side of the equation, the Fed pays for bonds with money it creates out of thin air and the banks inject that new money into the economy. That is, by definition, inflation.

The question is how will the government finance these massive deficits that will only get bigger with this new spending bill when the Fed is on the sideline?

The answer is it won’t. Not in over the long term. If the Fed doesn’t go back to quantitative easing (bond buying), interest rates will rise much higher and crush the federal government under interest payments.

In fact, the US government is already having trouble with rising interest rates.

In fiscal 2022, the US Treasury forked out $475 billion just to fund the government’s interest payments. That was up about 30% from fiscal 2021. Interest expense already ranks as the sixth largest budget expense category, about $250 billion below Medicare.

According to the Congressional Budget Office, interest expense is about to balloon. It projects interest payments will triple from nearly $400 billion in fiscal 2022 to $1.2 trillion in 2032. And it’s worse than that. The CBO made this estimate in May. Interest rates are already higher than those used in its analysis.

If interest rates remain elevated or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debt HERE.)

The bottom line is the Fed can’t slay inflation while the federal government is spending itself deeper and deeper into debt. Given that there is no end in sight to the spending, we should expect inflation to remain with us for the indefinite future.

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

Is the Fed Easing Up on the Inflation Fight?

Is the Federal Reserve easing off the accelerator on its inflation fight? The answer depends on whether you believe your eyes or your ears.


Fed Officials Claim They Can Shrink the Balance Sheet a Lot More; They Can’t

Federal Reserve officials insist they can still shrink the balance sheet significantly more than they already have. You can file this assertion under the same category as “inflation is transitory,” and “the problems in the subprime mortgage market are contained.” In other words, Fed officials have detached from reality — again.


The Trillion-Dollar Coin: A Dumb Idea That Won’t Go Away

Policy wonks and government people come up with some really dumb ideas. And a lot of those dumb ideas just won’t go away. Now that we’re in the early stages of the fake debt ceiling fight, a really dumb idea has been resurrected from the dead – the trillion-dollar coin.


Here We Go Again! It’s Time for Another Debt Ceiling Fight

Here we go again. The clock is ticking down to another US debt ceiling fight. According to Treasury Secretary Janet Yellen, the US government will officially bump up against the debt ceiling Thursday (Jan. 19).


Is “Cooling” CPI Setting the Stage for More Inflation?

Based on the headline numbers, price inflation cooled again in December, boosting market optimism that the Federal Reserve will continue to ease off the pedal on its monetary tightening. But this could be setting the stage for more price inflation down the road. And a deeper look at the data reveals that a lot of […]


About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
View all posts by

Comments are closed.

Call Now