by Peter Schiff, Schiff Gold:
The US government ran the biggest December budget deficit in history last month.
The December budget shortfall came in at $143.6 billion. That compares with a $13.3 billion deficit in December 2019, according to the Monthly Treasury Statement.
Spending continues to drive the ballooning budget deficits. Receipts were actually up 3% year-on-year in December, but outlays exploded by 40% year-on-year. Uncle Sam spent $490 billion in a single month. Just three months into fiscal 2021, the federal government has already blown through over $1.3 trillion.
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In the first quarter of fiscal 2021, the US government ran a deficit of over half-a-trillion dollars ($572.9 billion). In other words, in a mere three months, Uncle Sam has pushed the deficit over halfway to $1 trillion. Before last year, the federal government had only run annual $1 trillion deficits four times – all during the Great Recession.
As of Jan 12, the national debt stood at $27.697 trillion. According to the National Debt Clock, the debt to GDP ratio stands at 130.57%. Despite the lack of concern in the mainstream, debt has consequences. Studies have shown that a debt to GDP ratio of over 90% retards economic growth by about 30%. This throws cold water on the Republican mantra “we can grow ourselves out of the debt.”
Most people shrug off these massive deficits, reasoning that they are simply a product of the economic problems caused by the coronavirus. But the pandemic has papered over an ugly truth – the federal government was getting into near-record deficit territory before COVID-19 arrived on the scene.
In fiscal 2019, the Trump administration ran a $984 billion deficit. At the time, it was the fifth-largest deficit in history. The upward trajectory continued through the first two months of fiscal 2020, with the budget shortfall running 12% over 2019’s huge number before coronavirus hit the US.
The government’s response to the pandemic put the borrowing and spending on hyperdrive. And there is no sign that it will end any time soon. President-elect Joe Biden is expected to unveil another stimulus bill in the trillions. With Democrats controlling Congress and the White House, it seems likely that the spending pace will increase in 2021, not slow down.
Big deficits have another pernicious effect on the economy – they drive inflation.
The Federal Reserve makes all of this borrowing and spending possible by backstopping the bond market and monetizing the debt. The central bank buys US Treasuries on the open market with money created out of thin air (debt monetization). This creates artificial demand for bonds and keeps interest rates low. All of this new money gets injected into the economy, driving inflation higher. The Fed expanded the money supply by record amounts in 2020.
Even with the incredible amount of quantitative easing the Fed is engaged in today, many analysts expect another $3 trillion deficit in 2021 with additional stimulus spending needed to prop up the economy in the aftermath of COVID-19. According to Bank of America analysis, the Fed will need to double QE in 2021 just to keep up with the government’s projected debt issuance.
The more money the Fed creates, the more inflationary pressure mounts. But as long as the federal government continues to borrow and spend, the Fed can’t stop monetizing the debt. If it does, interest rates will spike. That’s a non-starter given the piles of debt in the economy – not just government, but also corporate and consumer debt. Rising inflation pushes interest rates up forcing the Fed to continue its inflationary monetary policy to hold rates down. In a recent podcast, Peter Schiff said we are heading toward “an inflationary holocaust.”
It’s going to be a death spiral of inflation where the more inflation we get the more inflation the Fed is forced to create.”
In effect, this is a massive tax on the American people. Instead of taking money directly from you, the Fed steals the purchasing power of your money in a stealthy inflation tax. In a nutshell, debt is neither free nor is it irrelevant. Borrowed money has to be paid back.