After running the biggest December budget deficit in history, the U.S. government followed up with another massive budget shortfall in January.
Borrowing and spending at record rates is a legacy President Donald Trump left to Joe Biden, and the new administration will almost certainly build and expand on it with gusto.
According to the Monthly Treasury Statement, the January deficit came in at $162.83 billion. That’s nearly five times bigger than the January 2020 shortfall.
That brings the total deficit for fiscal 2021 to $735.73 billion in just four months. To put that into perspective, that is slightly higher than the 2014 deficit and would rank in the top-10 highest deficits ever run.
Uncle Sam spent $547 billion in January. That brings total spending through the first four months of fiscal 2021 to $1.92 trillion. Spending in January was up 26 percent year-on-year.
Federal receipts came in at $384.7 billion, a 3 percent y-o-y increase.
As of Feb. 11, the national debt stood at $27.85 trillion. According to the National Debt Clock, the debt to GDP ratio stands at 130.93 percent. Despite the lack of concern in the mainstream, debt has consequences. Studies have shown that a debt to GDP ratio of over 90 percent retards economic growth by about 30 percent. 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 D.C.
Even without additional stimulus, the CBO estimates the 2021 deficit will hit $2.3 trillion. That would rank as the second-largest deficit in U.S. history, behind only last year’s $3.13 trillion shortfall. The CBO also projects the national debt will swell to an unfathomable $35.3 trillion by 2031.
As financial analysts Peter Schiff noted in a recent podcast, there seem to be increasing expectations on Wall Street that faster than expected economic growth thanks to stimulus will force the Federal Reserve to tighten monetary policy faster than expected. But this seems highly unlikely given that the central bank will have to monetize all of this debt. That means more bond purchases and more money printing.
The Federal Reserve makes all of this borrowing and spending possible by backstopping the bond market and monetizing the debt. The central bank buys U.S. 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.
The Fed had worked itself between a rock and a hard place. It has to print trillions of dollars to monetize the massive deficits. But that is causing inflation expectations to run hot. That is putting upward pressure on interest rates. But you can’t have rising rates when your entire economy is built on debt. The only way the Fed can hold rates down is to buy more bonds, which means printing more money, which means even more inflation. You can see the vicious cycle. At some point, there is a fork in the road and the Fed will have to choose. Step up and address inflation and let rates rise, which will burst the stock market bubble and collapse the debt-based economy, or just keep printing money and eventually crash the dollar.
This is why Schiff has 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 a nutshell, debt is neither free nor is it irrelevant. Borrowed money has to be paid back – whether through direct taxation or the stealthy inflation tax. 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.
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