It’s barely six months into the US government’s ‘fiscal year’ (which started on October 1, 2023) and the federal budget deficit is already $1.1 trillion.
This number is utterly astonishing.
Of course, anyone paying attention to the rapidly dwindling US financial condition knows that the national debt is now hovering around $35 trillion.
That’s up $2 trillion in the last year alone, and up nearly $20 trillion over the last decade.
More importantly, the Congressional Budget Office has projected that the US national debt will increase by another $20 trillion over the next decade.
Those numbers are obviously bad. Horrendous, really.
But what’s even worse is how much NEW debt the government actually needs to sell each year just to repay its OLD debt.
Remember, whenever the government borrows money, they issue bonds in various denominations; these bonds can be as short as 28 days, all the way up to 30 years.
Whenever these bonds mature, the Treasury Department is obviously supposed to pay them back in full. Of course the federal government doesn’t actually have money to repay its debts. So, instead they issue new debt to pay back the old debt.
And the amount of money they have to raise just to repay old debts is staggering.
Last year alone the Treasury Department had to raise nearly $20 trillion to repay maturing bonds. Plus, they borrowed an additional $2.4 trillion in brand new debt on top of the $20 trillion.
Unbelievable.
And so far in just the first three months of 2024, the Treasury Department has issued a record $7.2 trillion in government bonds– shattering the previous record for quarterly debt issuance that was set in 2020 during the pandemic.
Out of last quarter’s $7.2 trillion debt issuance, roughly $600 billion of that was brand new debt… meaning that a whopping $6.6 trillion was borrowed to refinance existing debt.
To put that number in context, the total combined value of all bank deposits in the United States is $17.5 trillion. So merely refinancing the federal debt that matured last quarter alone required the equivalent of 37% of all US bank deposits.
Now, in theory, refinancing US government bonds shouldn’t be such a big deal. After all, most bondholders typically just roll over their maturing bonds into new bonds. And the majority of the maturing bonds are short-term anyhow.
So, it’s quite common that some money market fund– which owns primarily 90-day Treasury Bills– will simply purchase more 90-day Treasury Bills whenever their existing ones mature.
No big deal, right?
Well, the problem is that bond investors are rightfully getting spooked by outrageous federal deficits, and they’re starting to demand a higher rate of return to compensate for the extra risk.
This is a major reason why interest rates have been rising– government bonds have lost a lot of appeal, and many investors no longer view them as the sacrosanct, risk-free investments they once were.
Two years ago, a 90-day T-bill paid about 0.5%. Today it’s over 5%. That’s a 10X increase in the government’s interest expense.
Another major trend is that bond investors have shifted towards the shorter duration maturities. So, instead of buying 10-year notes and 30-year bonds, they’re buying 90-day bills that have to be refinanced every three months.
This makes sense; with so much risk and uncertainty, few rational investors want to loan money to the federal government for three decades. Short-term bonds are a lot safer.
But this trend towards short-term bonds means that the Treasury Department has to constantly be in the market refinancing record amounts of debt, just like last quarter’s $6.6 trillion.
It also means that the government’s annual interest bill will continue to skyrocket– because today’s interest rates are so much higher than they were in the past.
Back in 2019, for example, investors were buying 5-year notes with a yield of less than 2%.
Those 5-year notes from 2019 are about to mature. And for investors who are willing to roll over their funds and reinvest in, say, 90-day T-bills, the new yield is 5.25%.
In other words, the government’s interest expense will increase more than 2.5x.
Remember that this year’s interest expense on the national debt is already set to exceed the national defense budget. And if this trend continues, the government’s annual interest bill will surpass $2 trillion over the next few years.
This is why we believe the Federal Reserve will ultimately step in and ‘fix’ this problem by expanding the money supply and slashing interest rates.
The US government cannot afford to pay 5% interest on the national debt. Frankly they can’t even afford to pay 1%. The Fed understands this reality, and they know that the clock is ticking.
That’s why the Fed has been so vocal about cutting interest rates over the past few months, even though inflation has been rising.
Minutes from the Fed’s meeting last month showed that they still anticipate cutting rates 2-3 times this year.
And just yesterday the Fed Chairman said that while rates may stay at current levels “longer than expected”, he all but ruled out any further interest rate increases despite rising inflation numbers.
As a final piece of evidence to support our view, the Fed has already reduced its ‘quantitative tightening’ program… which is essentially the first step towards a new round of quantitative easing, i.e. money printing.
As my partner Peter Schiff says, the Fed has lost the inflation war. But I would say they’re actually deserting the battlefield by abandoning their responsibility to keep inflation low.
The Fed believes that the insolvency of the US government is a far worse outcome than inflation, i.e. inflation is the ‘lesser of the two evils’.
And it seems clear that they’re already positioning their monetary policy to bail out the federal government.
Bottom line: this means more inflation. But don’t panic. It’s something you can prepare for, and even benefit from. More on that soon.
