On Monday afternoon, in a precursor to Wednesday’s quarterly refunding announcement, Treasury said it will borrow $2.99 trillion in the April-June quarter.
The previous plan was to pay down $56 billion of net marketable debt during the period. In other words, this is a net $3.06 trillion swing versus what was tipped in February.
Obviously, this is a consequence of virus relief spending and is affected by the change in timing for tax payments. “The increase in privately-held net marketable borrowing is primarily driven by the impact of the COVID-19 outbreak, including expenditures from new legislation to assist individuals and businesses, changes to tax receipts including the deferral of individual and business taxes from April – June until July, and an increase in the assumed end-of-June Treasury cash balance”, the statement reads.
The full quarterly refunding details will be out Wednesday morning.
As Congress spends to offset the dramatic hit to the economy from coronavirus containment measures, the deficit is set to explode. And that’s as it should be. Without government spending, the economy would sink into a black hole, never to be heard from again. And that’s just barely hyperbolic.
More than 30 million Americans have lost their jobs over the past six weeks, the unemployment rate is poised to hit a record high with the release of the April jobs report on Friday, and the US economy contracted sharply in the first quarter on the way to what will be the deepest recession on record once Q2 is in the books.
Nobody is concerned about the deficit right now. It would be ludicrous to obsess over figurative red ink at a time when the US economy faces an existential crisis the likes of which hasn’t been seen in a century.
Additionally, it would be political suicide to come out hawkish on government spending in the middle of a (literal) depression during an election year.
Jerome Powell (who has repeatedly stressed that the US is on an unsustainable fiscal path) last week emphasized that this is not the time to worry about such things. When asked about the deficit during a Fox interview late last month, Steve Mnuchin said simply: “We’re at war”.
Even the maddeningly dogmatic Committee for a Responsible Federal Budget admits this is no time to be… well, no time to be responsible about the federal budget.
“Combating this public health crisis and preventing the economy from falling into a depression will require a tremendous amount of resources – and if ever there were a time to borrow those resources from the future, it is now”, CRFB president Maya MacGuineas said last month.
“Now is not the time to worry about near-term deficits”, MacGuineas added, in what I’m sure was a painful concession.
The Fed will likely monetize the entirety of the stimulus, including any “phase four” relief bill.
What’s crucial to remember when you think about all of this, is that you’ve essentially been lied to for decades. None of the hand-wringing over deficits is warranted for the United States, and there’s something fundamentally ridiculous about the way this conversation unfolds in the public sphere.
In short, this is a totally illusory “debate” couched in completely nonsensical, self-referential terms that serve one purpose and one purpose only: To perpetuate the myth that these figures actually matter for the issuer of the world’s reserve currency.
For example, Lloyd Blankfein tweeted the following last month:
In finance, most surprising to me is that despite the trillions the US is adding to our budget deficit and national debt, investors (many foreign) will lend the US a virtually limitless supply of dlrs for .6 pct for 10 years.
— Lloyd Blankfein (@lloydblankfein) April 23, 2020
Can you spot the absurd part of that tweet? If not, let me help. It’s Blankfein suggesting that the US needs to borrow dollars.
While we’ve all been conditioned to think in those terms, I (strongly) encourage you to take a step back and consider whether that assertion actually makes any sense. The idea that the US needs foreign investors to “lend” the country “dollars” isn’t just patently ridiculous – it’s almost nonsensical.
As Stephanie Kelton put it last week in remarks published by the Financial Times, “a currency-issuing government never needs to borrow its own currency”.
Kelton is more diplomatic about it than I am. “This should be obvious, but it is often obscured by the way governments manage their fiscal operations”, she writes.
Unfortunately, what would be common sense to almost everyone were it not for decades of misplaced indoctrination, is instead billed as “radical” (or “magical”) thinking. Indeed, even Bernie Sanders didn’t seem to fully appreciate or embrace the ideas espoused by his own economic advisor. And that may have cost Bernie, too. Because when pressed to explain how he planned to “pay for” his expensive agenda items, he never pulled the ace out of his sleeve, quite possibly because he didn’t know it was up there.
When you ponder the news flow around Treasury’s borrowing to “fund” virus relief and as you’re bombarded with deficit dogma, do yourself a favor and consider it all with the passages excerpted below from Kelton.
Although she’s generous enough to frame this as a debate, I’m ready and willing to say that it is no such thing. Rather, Kelton is just right. Full-stop. And that’s in part attributable to the fact that much of what she says is just a description of reality. It isn’t so much a “theory” as it is empirical analysis.
You are, of course, free to persist in fantasy – but I wouldn’t advise it. And I would gently note that if the myths Americans have been sold about the deficit were allowed to take precedence right now, small business in the country would suffer a veritable death blow, and tens of millions of jobs would be lost quite literally forever.
By Stephanie Kelton (excerpted from a longer post in the Financial Times)
Gone, for now, are concerns about how to “pay for” it all. Instead we are seeing wartime levels of spending, driving deficits — and public debt — to new highs.
France, Spain, the US, and the UK are all projected to end the year with public debt levels of more than 100 per cent of gross domestic product, while Goldman Sachs predicts that Italy’s debt-to-GDP ratio will soar above 160 per cent. In Japan, Prime Minister Shinzo Abe has committed to nearly $1tn in new deficit spending to protect a $5tn economy, a move that will push Japan’s debt ratio well above its record of 237 per cent. With GDP collapsing on a global scale, few countries will escape. In advanced economies, the IMF expects average debt-to-GDP ratios to be above 120 per cent in 2021.
While most see big deficits as a price worth paying to combat the crisis, many worry about a debt overhang in a post-pandemic world. Some fear that investors will grow weary of lending to cash-strapped governments, forcing countries to borrow at higher interest rates. Others worry governments will need to impose painful austerity in the years ahead, requiring the private sector to tighten its belt to pay down public debt.
They should not. While public debt can create problems in certain circumstances, it poses no inherent danger to currency-issuing governments, such as the US, Japan, or the UK. This is not, as some argue, because these countries can currently borrow at very low cost, or because a strong recovery will allow them to grow their way out of debt.
There are three real reasons. First, a currency-issuing government never needs to borrow its own currency. Second, it can always determine the interest rate on bonds it chooses to sell. Third, government bonds help to shore up the private sector’s finances.
The first point should be obvious, but it is often obscured by the way governments manage their fiscal operations. Take Japan, a country with its own sovereign currency. To spend more, Tokyo simply authorizes payments and the Bank of Japan uses the computer to increase the quantity of Yen in the bank account. Being the issuer of a sovereign currency means never having to worry about how you are going to pay your bills. The Japanese government can afford to buy whatever is available for sale in its own currency. True, it can spend too much, fueling inflationary pressure, but it never needs to borrow Yen.
If that is true, why do governments sell bonds whenever they run deficits? Why not just spend without adding to the national debt? It is an important question. Part of the reason is habit. Under a gold standard, governments sold bonds so deficits would not leave too much currency in people’s hands. Borrowing replaced currency (which was convertible into gold) with government bonds which were not. In other words, countries sold bonds to reduce pressure on their gold reserves. But that’s not why they borrow in the modern era.
Today, borrowing is voluntary, at least for countries with sovereign currencies. Sovereign bonds are just an interest-bearing form of government money. The UK, for example, is under no obligation to offer an interest-bearing alternative to its zero-interest currency, nor must it pay market rates when it borrows. As Japan has demonstrated with yield curve control, the interest rate on government bonds is a policy choice.
So today, governments sell bonds to protect something more valuable than gold: a well-guarded secret about the true nature of their fiscal capacities, which, if widely understood, might lead to calls for “overt monetary financing” to pay for public goods. By selling bonds, they maintain the illusion of being financially constrained.
In truth, currency-issuing governments can safely spend without borrowing. The debt overhang that many are worried about can be avoided. That is not to say that there is anything wrong with offering people an interest-bearing alternative to government currency. Bonds are a gift to investors, not a sign of dependency on them. The question we should be debating, then, is how much “interest income” should governments be paying out, and to whom?