It will be very challenging to meet the forecasts for government debt…
Cash flow trends at the U.S. Treasury suggest that it will be very challenging to meet the forecasts for government debt.
The major contribution of “quantitative easing” (QE) to federal government funding in recent years is clear from the table below, and reducing QE seems likely to be especially tough in view of inflation and the reluctance to allow interest rates to climb much.
The budget for the fiscal year 2023 was published recently by the Office of Management and Budget:
This document sets out longer-term forecasts on the deficit for the next 10 years, and the more near-term forecasts are for federal government gross debt of $31.292 trillion at 30 September 2022 and $32.593 trillion at 30 September 2023.
The five-year table below has been constructed from the historical records of daily Treasury statements, and the published Federal Reserve balance sheets closest to the end of the month are used to source the QE results. For the avoidance of doubt, the QE numbers quoted below relate entirely to the Federal Reserve holdings of U.S. Treasury bonds. Its holdings of mortgage securities are not included.
This recent history demonstrates that in the five years to 31 March 2022 the net debt of the federal government has increased by $9.855 trillion or 49.5%. In that period quantitative easing by the Federal Reserve contributed $3.296 trillion of the increase in net debt.
Shortly the Federal Reserve is due to commence a program to reduce QE and has committed to a monthly cap of $60 billion to reduce its holdings of U.S. Treasuries. This compares to an average monthly increase in QE over the 12 months to 31 March 2022 of $70 billion. Although not critical in itself, it is worthwhile to recall that debt lent to the federal government via QE is essentially interest-free since the Federal Reserve sends all profits from QE to the federal government.
In the current year this is worth about $100 billion to the government. Eliminating QE would increase the annual government deficit by this $100 billion.
Five-Year Table of U.S. Federal Debt Growth to 31 March 2022 ($ Billions in Debt)
In the six months since 30 September 2021 the increase in the net debt of the federal government has been $1.536 trillion and QE has contributed $0.329 trillion. If there is a $60 billion-per-month reduction of QE from April 2022 to meet the Office of Management and Budget forecast is going to require gross funding from outside investors of around $1.9 trillion in the six months to 30 September 2022 versus around $1.2 trillion (excluding QE) in the six months to 31 March 2022. This seems to be challenging as interest rates on Treasury debt are running well below the inflation rate.
Indeed, it seems likely to be a challenge to meet the spending commitments underlying the forecast through to 30 September 2022, since a number of items purchased by the federal government are going to be affected by price increases, such as energy. Similarly the OMB budget for the 12 months to 30 September 2023 looks to be challenging in terms of actual expenditure with a projected deficit of $1.3 trillion. This compares to a projected deficit of around $3 trillion in the 12 months to 30 September 2023.
It will be a challenge to get all the proposed tax increases agreed, and expenditure programs are always easier to start than to stop.
Results published in the daily Treasury statement up to 7 April indicate a cash outflow of $63 billion since the beginning of the month, so there is no evidence that the rate of cash outflow is diminishing. Also, the Federal Reserve balance sheet for 6 April, published last week, actually has a $1 billion increase in its holdings of Treasury bonds. The reduction of QE as it relates to Treasury bonds has yet to start.
So given recent history and the uncertain economic and political outlook with inflation an important risk, it seems likely that the deficit will continue to grow far faster than forecast and that the reversal of QE will prove to be extremely tough.
Robert Lambourne is a retired business executive in the United Kingdom who consults with GATA about the Bank for International Settlements and government finances.
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