Uncle Sam's plan to put $1 trillion a month on his credit card

I wanted to start with a simple government finance detail - if taxes aren’t enough to pay the bills, our government usually borrows for most of the rest. And once every three months, there’s a report where the US Treasury reveals how much they have borrowed in recent times, and how much they plan to borrow in the next 6 months.

Given our unprecedented levels of layoffs and stimulus spending, this normally dull report promised to be a lot more interesting today, when we learned just how much in IOU’s that Uncle Sam is going to give out in the near future. And it’s an eye-popping number.

The Treasury Department said Monday it expects to borrow a record $3 trillion in the second quarter to pay for the coronavirus relief measures passed by Congress. Looking ahead to the third quarter, Treasury said it expects to borrow $677 billion.

What’s even more shocking, if you dig into the Treasury Department’s document, is that the April-June quarter is usually when the government adds the least amount of red ink, and sometimes even REDUCES debt from its books. The red line in this chart tells the story.

In fairness, some of that leap is due to the fact that Americans can delay their taxes from the April-June quarter to the July-September one for this year. As a result, the feds will have less money coming in right as they need to take more money out. But the higher number in the July-September quarter should tell you that there will still be plenty of people out of work and/or in need of assistance at that time, which will mean that spending will still be very high.

So is the revealing of all this new debt causing financial problems? Not really, at least if you look at the treasury markets.

Yields on the 10-year Treasury note were slightly higher at 0.642% in afternoon trading. Bond prices fall as yields rise. The yield is down 1.284 percentage points over the past four months.

So the interest costs on all this new debt won’t be that much if those rates stay low.

The other potential problem with all this debt would be if prices got inflated due to too much money floating around. But that’s not happened so far, and in fact, a bigger concern might be price deflation for planted crops, dairy products, oil, and other goods. If that continues, then high debt taken on to continue demand might help to reduce further layoffs.

However, the shortages caused by numerous COVID 19 breakouts at meat processing plants could reverse that deflation, and cause prices to jump higher. For example, hog futures have gained back everything they lost when COVID 19 started to break out and tank the economy.

Here's the funny thing. If all of this monetary and fiscal money-printing works too well, and lots of people come back to work quickly, prices go back up for producers, and the stock market Bubbles back toward where it was 2 months ago, then we have a scenario for sizable inflation. But the massive borrowing projected by the Treasury Department, and the fact that people are willing to take rates of return of less than 1% for the next 10 years is basically an admission that the economy will not be bouncing back from these Depression-level deaths in the next few months. So prepare accordingly.