Don’t look right now, nevertheless the U.S. government needs to borrow more money at exactly the wrong moment — when interest rates are spiking.
Last week, in a development first reported by The Washington Post, the Treasury Department quietly released data estimating its 2018 borrowing needs would likely check in at $955 billion, then top $1 trillion within the next two fiscal years. Those sums are considerably higher than last year’s $519 billion in debt issued last year, as well as an upward revision to estimates released by the Treasury in late 2017. The federal government’s voracious financing needs come at a time when which’s already pulling in record levels of tax revenue, to the tune of $444 billion in October through November 2017.
The Treasury’s projections are also in line with an analysis by the Wharton School at the University of Pennsylvania last year, which estimated which the GOP’s tax cut would likely add upwards of $2 trillion in federal debt over the next decade.
Given the turmoil in markets as well as the broad-based tax cut just signed into law, the Treasury’s timing arguably couldn’t come at a worse time. Interest rates recently hit their highest level in four years, which have ricocheted across markets as well as prompted investors to sell everything in sight.
Meanwhile, the Federal Reserve can be anticipated to begin tightening monetary policy, which will effectively raise borrowing costs even further. So what does which all mean?
The political calculations appear fairly straightforward. Democrats, who opposed tax reform with near unanimity, are anticipated to point to the government’s surging borrowing, hammering away at which theme until the November midterm elections. Critics of President Donald Trump’s economic policy will also point to the irony of his remarks as a candidate, when he suggested the government could inflate away its debt simply by printing money.
Conventional economic wisdom suggests which within the long term, Uncle Sam’s burgeoning debt load will put upward pressure on interest rates as well as hammer the dollar (which has also taken a beating, in spite of soaring yields which theoretically should help bolster its appeal).
While printing money to erase debt seems like an easy solution, most economists warn which would likely put the earth’s largest economy on a fast track to hyperinflation as well as a devalued currency (think Zimbabwe as well as Venezuela).
A force multiplier behind Treasury borrowing can be the cost of doing so can be already at historically low levels — thanks to the Fed’s ultra-loose, crisis-era monetary policy. In fact, the Mercatus Center at George Mason University points out which interest rates have been on the decline for more than three decades, as well as borrowing costs for fresh debt issues are at least 5 times lower than 10 to 20 years ago.
“Such dramatic declines in borrowing costs put the Treasury within the driver’s seat when which came to funding deficits,” noted William Beach, Mercatus’ vice president for policy research, in a recent essay, noting which the average interest rate on public debt was less than 2.5 percent.
“Although the overriding consideration of the Treasury during the recession as well as recovery was simply funding the trillions in fresh debt, the low as well as declining average as well as marginal costs of doing so no doubt encouraged borrowing,” Beach added.
As for the U.S. as well as its relentless borrowing needs, the stakes are high. Analysts point out which U.S. debt can be on the rise at a time when the economy’s trajectory can be on pointing up. For Trump, soaring interest rates as well as greater government borrowing may conspire to undermine his lofty economic goals—especially his 3 percent growth target.
Indeed, last month the International Monetary Fund warned about the scenario currently unfolding in global markets.
The fund said which the near-term outlook was constructive, nevertheless said tightening financial conditions around the earth “would likely have implications for global asset prices as well as capital flows, leaving economies with high gross debt refinancing needs as well as unhedged dollar liabilities particularly exposed to financial distress.”