The Calm Before the Storm: $119 Billion Budget Deficit in March

The US government budget deficit in March came in at $119 billion, according to the latest US Treasury Department Report.

That’s a massive budget shortfall. But it’s actually the calm before the storm.

The March 2020 deficit came lower than the $146 billion shortfall in March 2020. But this was primarily a function of the calendar. Significant March outlays were pushed back into February. Overall, the budget deficit through the first half of fiscal 2020 stands at $744 billion, an 8% increase over FY2019.

Government receipts in March came in at $238 billion. That was a 3% increase over March 2019. Federal outlays totaled $356 billion. That was down about 5%. But with calendar adjustments, the March deficit was $170 billion, compared to an adjusted deficit of $136 billion in March 2019.

And the real budget storm is on the horizon.

The March deficit does not reflect the revenue shortfalls and massive spending increases coming down the pike due to the coronavirus government shutdown and the stimulus plan passed by Congress. Lead US economist at Oxford Economics Nancy Vanden Houten told MarketWatch she projects the 2020 deficit to come in well over $2 trillion.

With the economy in freefall depressing revenues and stimulus packages already in the pipeline, the deficit for the second half of fiscal 2020 is expected to be at least $1.5 trillion, bringing the deficit for the full fiscal year to around $2.2 trillion.”

The highest deficit on record was $1.413 trillion in 2009. In fact, 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 national debt eclipsed $24 trillion earlier this month.

To put the growth of the national debt into perspective, the debt was at $19.95 trillion when President Trump took office in January 2017. It topped $22 trillion in February 2019.  That represented a $2.06 trillion increase in the debt in just over two years. By November 2019, the debt had eclipsed $23 trillion. Now, less than six months later, we’re at $24 trillion, with much of the coronavirus stimulus still in the pipeline. That’s a $4 trillion increase in the debt since Trump took office.

The massive debt raises a number of questions few people seem to be asking. For instance, how will all of this government borrowing impact the bond market?

Investors poured into US Treasuries as a safe-haven as the coronavirus crisis grew. Interest rates plunged, with the yield on the 10-year Treasury dipping to record lows below 0.5%. At some point, the demand for bonds will ebb, but the supply certainly won’t. The US Treasury is going to have to sell a massive amount of bonds to fund all of this deficit spending.

The Federal Reserve has stepped in to backstop the borrowing. The central bank 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.

The Fed got away with this once. We didn’t see the type of price inflation one would expect with the three rounds of QE in the wake of the 2008 financial crisis. The inflation went into the stock market and other asset bubbles. That could conceivably happen again. But the last time around, then-Federal Reserve Chairman Ben Bernanke swore the QE wasn’t debt monetization. He promised it was a temporary expansion of the balance sheet. He insisted there was an exit strategy.

There was no exit.

Today, nobody is even talking about an exit strategy. Will investors actually believe this is going to be temporary? It seems unlikely.

And how all of this government debt will impact economic growth?

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 already stands at around 106.9% of GDP. 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.

Most people seem to believe the president will snap his fingers in the near future and the economy will snap back to normal. But the economy was broken before coronavirus. Now the government and the central banks are doubling down on the policies that broke it to begin with.