Global Macro Monitor

Here is a follow-up on last week’s chart with some excellent granular detail.   

Interest payments on the national debt during the current fiscal year (October to February) are up 29 percent y/y, one of the fastest-growing expenditure components of the Federal budget (see table). 

Revenues are down, especially individual income taxes, which may reflect the slowing economy.  Theory dictates (ceteris paribus) that government tax revenues should be rising with inflation, however.  Hmmm. 

The fact income tax receipts are lower but self-employment tax revenues (1099 employees) are higher, coupled with what is happening with the employment data, can we hypothesize that high income earners are leaving the workforce (or getting fired) and starting their own businesses, such as consultants, for example?  Or could it be just a timing issue? 

The overall deficit is exploding, btw, up 50 percent.  

If the current situation normalizes and Treasury securities lose their flight-to-quality bid, interest rates are going to spike faster than one of Elon’s rockets. 

Must view, folks!

Tough week, especially for European banks and equities.  

After normalizing post-COVID, the U.S. budget deficit is starting to turn up again.  The 12-month trailing deficit was $1.62 trillion at the end of February, or around 6.14 percent of GDP.   Good luck bringing inflation down to 2 percent, given those digits and trend. Moreover, financing the gaps during normal times without the Fed and a flight-to-quality bid for Treasury securities will be a challenge for the markets and will put upward pressure on interest rates. 

The U.S. Deficit As the 15th Largest World Economy 

For context, the current U.S. budget deficit in nominal dollar terms is larger than the economies (gross domestic products) of 178 of the 192 countries in the IMF WEO database.  That is, the difference between what the  U.S. government spends and takes in is greater in dollar terms than 93 percent of the world’s economies, or about the size of the Australian economy and more than 3x Ireland’s GDP, folks.  Stunning.

Prepare to hear all about it as the debt ceiling debate heats up.  Tax hikes or spending cuts to reduce the hole is the political question…or just ignore it and wait for the mother of all crises to wash ashore. Most likely, the latter. 

After last September’s budget debacle in the U.K. and the resulting market turmoil,  which ultimately forced the prime minister’s resignation,  we now know deficits do matter.   

QOTD = Quote of the Day