We are reposting the Appendix added and updated to yesterday’s post, America’s Fiscal Mirage: Tariff Sugar Rush, Structural Hangover. We thought it important as President Trump has formally requested a historic $1.5 trillion national defense budget for Fiscal Year 2027. This represents a massive 44% increase over the current year’s base funding levels, marking the largest year-over-year military spending hike in post-World War II history. There is no doubt the markets will balk at deficit financing this without much higher interest rates, thus more pressure coming to cut spending on Medicare/Medicaid and Social Security programs. The “crowding out” chickens are finally coming home to roost.

The conventional political narrative holds that Biden blew up the federal deficit. The data tell a more complicated story, and one that will surprise many.

Presdient Obama left office with the rolling 12-month deficit at a relatively disciplined 3% of GDP. Trump 1.0 then widened the structural deficit to nearly 5% of GDP by March 2020, before the COVID pandemic began to spread in the United States. The pandemic did the rest: emergency spending exploded the deficit to 15.2% of GDP by December 2020. What is rarely acknowledged is that Trump handed Biden a deficit already running at 15% of GDP — among the largest in U.S. peacetime history. Biden’s early months pushed it marginally higher to a peak of 18.1% by March 2021, but the trajectory was largely baked in before the inauguration.

The fiscal shock was too large for private bond markets to absorb. The Fed stepped in as the bond and U.S. Treasury debt buyer of last resort, purchasing 83.6% of all net new Treasury notes and bonds issued between February 2020 and June 2021 — funding 91% of net issuance when incremental T-bills are included. That is digital money-printing at scale, and it is the true origin story of post-COVID inflation in both financial assets and goods and services.

(Source: U.S. Treasury, FRED, Global Macro Monitor. Full fiscal scorecard: global-macro-monitor.com)