Enjoy Your Future; We’re Spending It Now

Welcome to your future. Your government is spending it right now. And your children’s and grandchildren’s future to boot.

The US Treasury plans to borrow $2.99 trillion in the second quarter. The Treasury also plans to borrow another $677 billion in the July-September quarter, bringing the total fiscal 2020 debt to $4.48 trillion.

It’s a level of borrowing that’s difficult to even wrap your head around.

To put it into some perspective, before the pandemic, the CBO projected that the federal deficit would come in at just over $1 trillion in fiscal 2020. The government is set to borrow nearly three times that in just three months. And the one-year total borrowing will nearly equal the total of the four biggest yearly budget deficits on record. The level of government borrowing will crush the previous quarterly record of $596 billion set during the height of the 2008 financial crisis. It’s nearly two-and-a-half times the total amount of money the US Treasury borrowed in all of 2019.

The national debt hit $24 trillion just a few weeks ago. By the end of the quarter, it will likely be well north of $27 trillion and climbing. Keep in mind, the federal government was already borrowing at a torrid pace before coronavirus.

The federal government has only run deficits over $1 trillion in four fiscal years, all during the Great Recession. The fifth trillion-dollar deficit was coming down the pike in fiscal 2020, despite what Trump kept calling “the greatest economy in the history of America.” Simply put, the Trump administration was already running significant budget deficits even before the coronavirus crisis and debt was piling up at a dizzying pace. The deficit already featured numbers you would expect to see during a massive economic slowdown. Response to the pandemic has put spending and debt in hyperdrive.

The unfathomable level of borrowing has caught the mainstream media’s attention, but virtually nobody questions the wisdom of injecting trillions of dollars of stimulus into the economy. Pretty much everybody accepts that borrowing and spending are necessary due to the economic destruction wrought by the government shutdowns. As the AP put it, “Private economists believe that the government has little choice but to spend the money now to prevent an even worse downturn and possibly even a situation like the Great Depression of the 1930s.”

Ironically, it was the government that crippled the economy to begin with.

But even if you accept the necessity of stimulus spending, an important question remains unanswered. Actually the question remains unasked.

How are we going to pay for this?

Borrowed money has to be paid back. We are effectively taking future productivity and spending it now. There are only two ways to pay off government debt – higher taxes and inflation.

Expect both.

The Federal Reserve is already inflating the money supply at an unprecedented rate. Were it not for the central bank backstopping all of this borrowing, bond prices would tank and interest rates would soar. But the Fed is set up and primed to monetize all of this debt through QE Infinity. Ostensibly, by creating artificial demand for Treasuries, the Fed will be able to soak up excess supply and hold interest rates down. It has no choice because rising interest rates would be the death knell for this debt-riddled, overleveraged economy.

But the central bank will create trillions of dollars out of thin air and inject it into the economy in order to run this debt monetization scheme. That raises the specter of inflation. This is one reason Peter Schiff recently said hyperinflation has gone from the worst-case scenario to the most likely scenario.

It’s also important to remember that debt retards economic growth. Borrowing trillions now might serve as a “lifeline” for a drowning economy today, but it may end up suffocating us tomorrow.

The CBO warned before the coronavirus pandemic that the growing “debt would dampen economic output over time.” In fact, studies have shown that GDP growth decreases by an average of about 30% when government debt exceeds 90% of an economy. US debt stood at around 106.9% of GDP before the pandemic. Ever since the US national debt exceeded 90% of GDP in 2010, inflation-adjusted average GDP growth has been 33% below the average from 1960–2009, a period that included eight recessions.

Europe’s spending binge serves as a prime example of the impact of debt on economic growth.

But future taxes, hyperinflation and stunted economic growth aren’t our concern right now. We’ll cross that bridge when we get there. We have a crisis today. Everybody needs a bailout right now. The government is handing out money it doesn’t have left and right. This is all justified because of coronavirus. We have to deal with today. We can’t worry about tomorrow.

But tomorrow will come.