Another Month, Another Huge Budget Deficit

The US government ran another huge budget deficit in April. The shortfall came in at $225.58 billion, running the total budget deficit through the first seven months of fiscal 2021 to a record $1.9 trillion, according to the Treasury Department’s Monthly Treasury Statement.

That compares with a $1.5 trillion deficit through the first seven months of fiscal 2020, which included the first round of stimulus checks in April 2020.

Some mainstream media outlets spun the April numbers as good news. Last month’s deficit was significantly smaller than the $660 billion shortfall Uncle Sam ran in March as it passed out billions of dollars to Americans. But the US government continues to spend wildly and run up massive debt.

The federal government spent another $664.8 billion in April. That was the second-largest level of outlays in fiscal 2021, topped only by March with the distribution of stimulus 3.0. In fiscal 2021, the US government has spent a staggering $4.07 trillion.

The only thing that kept the budget shortfall from being even bigger was the fact that it was the best month for federal receipts this fiscal year. Uncle Sam collected $439.2 billion in April, primarily due to payments of individual income taxes.

The national debt currently stands at $28.17 trillion.

According to the National Debt Clock, the debt to GDP ratio is 127.8%. Despite the lack of concern in the mainstream, debt has consequences. 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.

President Biden has already pitched a number of corporate and individual tax increases, but most of this borrowing and spending will be paid for through an inflation tax that will hit us as the Federal Reserve monetizes this massive debt.  That means more bond purchases and more money printing. In fact, this is already happening.

The Federal Reserve makes all of this borrowing and spending possible by backstopping the bond market and monetizing the debt. The central bank buys US Treasuries on the open market with money created out of thin air (debt monetization). This creates artificial demand for bonds and keeps interest rates low. All of this new money gets injected into the economy, driving inflation higher. We see this playing out before our eyes as the Fed has expanded the money supply by record amounts.

The Consumer Price Index is exploding, leading a lot of people in the mainstream to believe the Federal Reserve will tighten monetary policy, raise interest rates, and even taper its bond-buying program to fight inflation. But the question remains: how does the Fed tighten when it has to monetize trillions in debt? How can an economy built on borrowing and spending function if interest rates rise?

Simply put — it can’t.

The Fed had worked itself between a rock and a hard place. It has to print trillions of dollars to monetize the massive deficits. But that is causing inflation expectations to run hot. That is putting upward pressure on interest rates. But you can’t have rising rates when your entire economy is built on debt. The only way the Fed can hold rates down is to buy more bonds, which means printing more money, which means even more inflation. You can see the vicious cycle. At some point, there is a fork in the road and the Fed will have to choose. Step up and address inflation and let rates rise, which will burst the stock market bubble and collapse the debt-based economy, or just keep printing money and eventually crash the dollar.