Congress “solved” the debt ceiling problem by effectively eliminating borrowing limits for the next two years. But it did nothing to address the underlying problem. And that underlying problem is painfully obvious when you look at the monthly budget deficits the federal government continues to run month after month.
In May, the Biden administration piled another $240.3 billion onto the fiscal 2023 deficit, running it to $1.38 trillion with four months left to go, according to the latest Monthly Treasury Statement.
It was the fourth-highest monthly deficit of fiscal 2023.
The US Treasury reported a surplus in April with an influx of tax payments, but there were ominous signs. Compared to April 2022, tax receipts were down 26.1%. That plunge in revenue pushed the April budget surplus down by 43% compared to last year’s.
This reflects the fact that federal revenues are generally falling. In May, the Treasury reported receipts of $307.5 billion. That was a 26.5% drop from May 2022.
This wasn’t unexpected.
Last year, strong tax receipts helped to paper over the spending problem. The federal government enjoyed a revenue windfall in fiscal 2022. According to a Tax Foundation analysis of Congressional Budget Office data, federal tax collections were up 21%. Tax collections also came in at a multi-decade high of 19.6% as a share of GDP. But CBO analysts warned it won’t last. And government tax revenue will decline even faster if the economy spins into a recession.
In a nutshell, the US government faces a double-whammy of falling receipts and increasing spending.
In May, the Biden administration blew through another $547.8 billion. That was a 20.3% increase over May 2022.
Now, you might be thinking that with the spending cuts in the Fiscal Responsibility Act, Congress fixed this problem. But we live in an upside-down world where spending cuts mean spending still increases.
In other words, the spending cuts will not up a dent in current spending. That means we can expect these massive deficits to continue month after month. And it’s only a matter of time before Congress and the Biden administration abandon the pretense of spending cuts to address the next crisis.
Keep in mind, the feds now have a credit card with no limit.
The fundamental issue wasn’t that the US government couldn’t borrow enough money. The fundamental problem was, and still is, that the US government spends too much money. Despite the pretend spending cuts, the debt ceiling deal didn’t address that problem. Even with the new plan in place, spending will go up. And it’s already historically hight. That means big budget deficits will continue and the national debt will mount.
Meanwhile, according to the National Debt Clock, the debt-to-GDP ratio stands at 120.7%. Despite the lack of concern in the mainstream, debt has consequences. More government debt means less economic growth. Studies have shown that a debt-to-GDP ratio of over 90% retards economic growth by about 30%. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC.
To put the debt into perspective, every American citizen would have to write a check for $95,272 in order to pay off the national debt.
This is an unsustainable trajectory, especially in a high-interest rate environment.
According to an analysis by the New York Times, net interest costs rose by 41% last year. According to the Peterson Foundation, the jump in interest expense was larger than the biggest increase in interest costs in any single fiscal year, dating back to 1962.
The cost of financing the debt will almost certainly rise even more now that Congress has done away with the debt ceiling for two years.
As the Treasury floods the market with new debt, bond prices will likely fall in order to create enough demand for all of those Treasuries. Bond yields are inversely correlated with bond prices, and as prices fall, interest rates rise.
A Bank of America note projects that the anticipated post-debt ceiling bond sale would have an impact equivalent to another 25 basis point Federal Reserve rate hike.
If interest rates remain elevated or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debt HERE.)
The soaring national debt and the US government’s spending addiction are big problems for the Federal Reserve as it battles price inflation. As you’ve already seen, the push to raise interest rates is putting a strain on Uncle Sam’s borrowing costs. But there is an even bigger problem. The Fed can’t slay monetary inflation — the cause of price inflation — with rate cuts alone. The US government also needs to cut spending.
That’s not happening, despite Republican Party talking points.
Something has to give. The Fed can’t simultaneously fight inflation and prop up Uncle Sam’s spending spree. Either the government will have to cut spending in real life, or the Fed will eventually have to go back to creating money out of thin air in order to monetize the debt.
It’s pretty clear where we’re heading.
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