Now For Some Good News


The U.S. budget deficit (12-month trailing) has fallen from almost 20 percent of GDP in Q1 2021 — most of which was indirectly financed by the Fed and an increase in Treasury bill issuance — to our estimate of 4.91 percent for April. That’s an incredible fiscal adjustment – albeit from an extraordinary level — and explains much of the growth slowdown. 

During my emerging market days, the first impression of seeing such a massive budget adjustment was that a dramatic fall in interest payments had occurred as inflation plummeted along with nominal interest rates falling. It was one reason why the “primary deficit” concept- the difference between government revenues and spending, excluding interest payments- was developed. 

If  U.S. interest rates rise to their true market-clearing levels, it probably won’t be long before we hear primary deficit debates at the kitchen table.  Interest payments on the Federal debt in Q1 2022 totaled $561 billion annualized or about 2.3 percent of GDP, down from the high of  5 percent in the 1980s.    

April Performance

Revenues for the Federal government were up 97 percent y/y in April (tax payment cycle getting back to normal coupled with strong “normal” growth), and expenditures fell 16 percent, resulting in a budget surplus for the month of $308 billion, the largest on record. 

The normalization of the deficit helps the Fed exit its bond-buying business leaving private markets to finance the government shortfalls, which will still be more than $1 trillion per annum. 

We suspect, without the Fed, it will take higher longer-term interest rates from current levels to attract buyers in a high inflation world, and is a, if not, the. major factor rocking stocks.  

No Free Lunch

To finance itself, the government can’t rely on foreigners, haven flows, and stock short proxies (probably the dominant buyers over the past few days).  

Time to pay up, Uncle Sam. Yields need to rise as and when the economy gets back to normal.

Otherwise, consumers will pay up with higher prices, just as they are now.

There are no free lunches in economics, folks.

Maybe delayed payment, at best, but someone eventually pays the price.

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