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The Biden Budget: Borrow and Spend to Infinity and Beyond

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President Joe Biden released his 2022 budget this week. The $6 trillion spending plan offers a glimpse into Biden’s long-term fiscal strategy – borrow and spend to infinity and beyond.

The Biden budget would take the US to its highest sustained spending levels since World War II.

And here you thought the pandemic emergency was winding down and spending would go back to normal. Well apparently, this is the new normal.

According to the number-crunchers, the Biden budget would push the debt to GDP ratio beyond levels reached during the Second World War, this despite some $3 trillion in tax increases. Projecting into the future, the proposed budget would increase federal spending to $8.2 trillion per year by 2031, meaning annual deficits of over $1.3 trillion. Over the next decade, the Biden plan would add an additional $14.5 trillion to the national debt.

The plan appears to be to spend more on everything, from the Pentagon to social programs. The budget includes money for Biden’s infrastructure plan and the “American Families Plan,” along with a $1.5 trillion request for Pentagon operating expenditures.

As with any budget proposal, the reality will likely prove worse than the projections. The government will almost certainly spend more than planned and tax receipts will come in under projections. That means even bigger deficits piled onto an ever-growing national debt.

There are also some fantasy numbers cooked into the budget plan. According to White House projections, consumer prices won’t rise faster than 2.3% per year and the Fed will slowly raise rates from their current rock-bottom levels.

That’s sheer nonsense.

There is no way the Federal Reserve can raise rates as the US government borrows the trillions necessary to fund all of this spending. Even a modest increase in rates would bury Uncle Sam under interest payments on the debt.

On top of that, the Fed will have to continue buying US Treasuries in order to monetize this massive debt.

The central bank makes all of this government and spending possible by creating artificial demand in the bond market. The Federal Reserve buys Treasuries on the open market with money created out of thin air. This supports bond prices and keeps interest rates artificially low. Without this central bank intervention, there wouldn’t be enough demand in foreign and domestic markets to absorb all of the bonds the US Treasury needs to sell. Interest rates would skyrocket and make the cost of borrowing prohibitive.

Since March 2020, the federal government has added $4.7 trillion to the national debt. The Fed bought $243 billion in US Treasuries in the first quarter of 2021 alone. Since it launched QE Infinity in March 2020, the Fed has purchased a staggering $2.44 trillion in US government bonds. In other words, the Fed has monetized more than half of the US debt accrued since the beginning of the pandemic.

How does anybody think the Fed can suddenly stop this debt monetization program as the US government borrows and spend even more money?

And as the central bank monetizes the debt, it creates money out of thin air. This means more inflation on top of the inflation we already have. It seems unlikely consumer prices won’t rise faster than 2.3% per year. (Which incidentally is above the Fed’s mythical target.)

If the central bank does take its thumb off the bond market in order to deal with inflationary pressures, interest rates will spike. That’s not a viable option when your entire economy is built on borrow and spend.

Biden claimed his budget “invests directly in the American people and will strengthen our nation’s economy and improve our long-run fiscal health.”

It’s more like a blueprint for bankruptcy and economic collapse.

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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.
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