The richest and most powerful nation in the world just acknowledged that they are in dire need of cash.
Of course, the U.S. government wouldn’t simply say it is running on huge budget deficits. However, if you look at their actions instead of what they’re saying, you’d be able to read between the lines.
The first sign revealing that the U.S. government was strapped for cash can be traced back to July when Congress passed a bill that suspended the debt ceiling for two years. The passing of the bill is key as it enabled the Treasury Department to issue bonds to fund ongoing government deficits. This sets the table up for the Federal Reserve to restart its balance sheet expansion.
Over the last few weeks, we’ve been closely following the U.S. global dollar squeeze. The crisis became clearer on Oct. 11 when the Federal Reserve announced that it will purchase $60 billion in T-bills per month to boost reserves in the banking system. According to Luke Gromen, founder of the macroeconomic research firm Forest for the Trees, the announcement was a signal that the Fed is financing U.S. deficits.
Macro Economic Strategist: ‘No One Is More Short Dollars Than the U.S. Government’
In an interview with MacroVoices, the research firm executive emphasized that the dollar shortage has already hit the U.S. before everyone else. The narrative has changed based on the Fed’s decision to grow its balance sheet with T-note purchases while conducting operations in the overnight lending markets.
According to Gromen, it was an admission that the U.S. government will need $60 billion per month or $720 billion per year, perhaps maybe more, to stay solvent. While the press release talks about providing reserves in the banking system, the top honcho of Forest for the Trees was certain it will be used to fund budget deficits.
Otavio Costa, portfolio manager at Crescat Capital, can see why Mr. Gromen believes that the central bank’s expansion of its balance sheet is a move to fund government deficits. He told CCN.com,
There is a chance that excessive Treasury issuance could be causing the turmoil in the repo market. If so, one could argue this Fed intervention is in a way helping to finance the government deficits. This policy already expanded the balance sheet by $196 billion since August, and should be perceived as an acknowledgement of weakening economic conditions.
In addition, in an interview with MacroVoices, Mr. Gromen said that Dallas Federal Reserve chairman Robert Kaplan revealed that,
the big change in need for reserves is dramatic increase in Treasury issuance that takes liquidity out of the system.
In Gromen’s mind, this is just another form of quantitative easing and its objective is to fund the U.S. government.
Low Interest Rate Environment Likely to Stimulate More Borrowing
The good news is that the U.S. government can take on more debt. Economist Alex Kruger spoke to CCN.com regarding the sustainability of federal debt, which is over $20 trillion. He said,
It is [sustainable] as of now as the debt service is around historical lows. A problem will arise if interest rates start trending higher.
It could be some time before we see the Fed hike interest rates. According to Bloomberg, traders are almost sure that there will be another rate reduction this month. There are also talks that another rate cut could happen in December.
It appears that the formula is to reduce rates while issuing Treasury notes. You don’t need to read between the lines to see that the United States government is pulling out all the stops to stay operational.
Last modified: September 23, 2020 1:11 PM