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During “Boom” the US Government Is Borrowing Money Like We’re in a Recession

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The economy is booming – or so we’re told. But the federal government is borrowing money like we’re in the midst of a deep recession.

Long-term US debt sales have risen to a level not seen since the height of the Great Recession. Meanwhile, the Treasury Department announced the creation of a new benchmark short-term 2-month Treasury bill.

All of this is in an effort to cover a rapidly upward-spiraling national debt even as some of the big players in the bond market sit on the sidelines. The federal deficit is projected to hit $833 billion this year, up from $666 billion from the fiscal year that ended last September. The deficit has widened due to a combination of tax cuts and increased spending passed by the Republican Congress. The US government is rapidly hurtling toward a $22 trillion debt.

To cover the deficit, the Treasury Department plans to pile onto the debt, issuing $329 billion through credit markets during the July-September period. According to Reuters, the borrowing estimate for the third quarter ranks as the highest since the same period in 2010 – at the height of the Great Recession. It comes in as the fourth-largest level of borrowing on record for the July-September quarter.

Treasury said that it will increase the sizes of the 2-, 3- and 5-year note auctions by $1 billion per month over the next three months. It will also increase auction sizes by $1 billion for each of the next 7- and 10-year notes and 30-year bond auctions in August and hold auction sizes steady at that level through October. It will also boost the auction size of its next 2-year floating rate note issue by $1 billion.”

According to the Reuters report, rising federal borrowing doesn’t come as any surprise, but it has “rekindled concerns” about the impact on the bond market. The story noted that the yield on the 10-year Treasury crossed the 3% threshold again. That means bond prices are coming down and interest rates are rising as the supply outstrips demand.

Back in February, we raised the question: Who is going to buy all of the debt? As we reported earlier this summer, both the Japanese and Chinese are dumping US Treasuries, not buying. These two countries rank as the number one and two holders of US debt. And as Reuters reports, the Federal Reserve is also shedding bonds from its balance sheet. The last time the US sold Treasuries at this pace, the Fed was buying.

The US central bank has also been gradually cutting its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, which it bought in the wake of the 2007-2009 financial crisis and recession.”

In order to entice buyers into the market, bond yields will likely have to rise significantly. That means increasing interest rates – not a good scenario for an economy built on a pile of debt. The cost of servicing the US debt has already hit a decade high. At the current trajectory, the cost of paying the annual interest on the US debt will equal the annual cost of Social Security within 30 years. It’s not just the federal government that will struggle in as high interest rate environment. As the Sovereign Man has pointed out, higher interest rates will have an enormous impact on just about everything.

Many major asset prices tend to fall when interest rates rise. Rising rates mean that it costs more money for companies to borrow, reducing their leverage and overall profitability. So stock prices typically fall. It’s also important to note that, over the last several years when interest rates were basically ZERO, companies borrowed vast sums of money at almost no cost to buy back their own stock. They were essentially using record low interest rates to artificially inflate their share prices. Those days are rapidly coming to an end.”

Republicans tell us not to worry. The economy will grow its way out of this problem. Treasury Secretary Steven Mnuchin said last week “we are well on the path” toward four to five years of sustained 3% growth. This completely ignores the fact that we’re way past due for a cyclical recession. It also ignores that debt stunts economic growth. Multiple studies have shown that a debt-to-GDP ratio over 90% retards growth by about 30%. Many analysts say the ratio is already at 105% and CBO analysts project it could hit 140% in the not-too-distant future.

As Peter Schiff told Fox Business host Charles Payne earlier this week, this is Keynesianism and Keynesianism doesn’t work.

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