President Biden and Treasury Secretary Yellen seem to be playing a reckless game of chicken on the debt ceiling. Yellen has repeatedly said June 1 is the X date, while also saying she is not making other plans in case a deal is not reached. Yet, Uncle Sam has already reached the functional X Date - an unworkably low cash balance.
Wednesday, there was just $49 billion in the Treasury General Account (TGA), after $25 billion came out to pay regular weekly Social Security benefits, as it does every Wednesday. A year ago, there was $817 billion in the TGA.
President Biden and House Speaker McCarthy delayed their meeting on the debt ceiling from Friday to Tuesday. Maybe there’s progress as aides “negotiate.” Yet, the debt ceiling crisis is but a symptom of a much more consequential debt crisis in the U.S.
It is not too much of an exaggeration to say that Biden’s massive spending imperils the nation, risking an eventual fatal default, not simply a temporary immediately-curable default. The debt ceiling has served a valuable function in forcing the nation to confront its unsustainable spending habit and its mountain of accumulated debt.
The debt ceiling standoff between President Biden and House Republicans has reached a moment of truth. Yesterday, suddenly and belatedly, Treasury Secretary Yellen warned that June 1 could be the “X date.”
That’s the date on which our Treasury can no longer employ “extraordinary measures” to keep the nation’s debt below the current ceiling and avoid default. Why is the deadline so much sooner than expected?
April tax receipts came in far below expectations, and Uncle Sam has been spending more and more money every month.
President Biden and Speaker McCarthy are running out of time. That’s what the numbers are telling us in the months since January, when the Treasury said it could employ “extraordinary measures” to remain under the ceiling for five months.
The most important “measure” is income tax collections. They look likely to fall significantly short of Washington’s expectations this filing season, dragged down by plunging receipts from capital gains taxes.
Capital gains taxes are likely to come in below the Congressional Budget Office projection of $315 billion for the full fiscal year of 2023. CBO’s forecast is down only $63 billion, or 17%, from last fiscal year’s record high of $378 billion that was produced by the eye-popping rise in stocks of 27 percent in 2021, as measured by the S&P Index .
Such a modest decline seems unlikely given that the stock market in 2022 had a dramatic reversal of fortune and plunged almost 20%. That’s a greater annual decline than in any year since 2008, when the S&P plunged 38% and capital gains taxes fell about 50% the next fiscal year, according to CBO.
Washington is now consumed by the question of whether to raise the ceiling on the national debt. That ceiling currently stands at $31.38 trillion, barely above the $31.34 trillion of outstanding debt subject to the ceiling, according to the latest Daily Treasury Statement.
January 20, 2023
The so-called responsible faction in the impending debt debate says that the ceiling should be raised without any risk of default. The nation’s creditworthiness, they argue, shouldn’t be held hostage by conditions of fiscal discipline. The White House falls into this faction, insisting on a higher ceiling without any strings attached.
A group of about 20 House Republicans—many of whom originally opposed Kevin McCarthy’s speakership—announced their opposition to raising the ceiling without spending cuts. On Bloomberg TV on Wednesday, Representative Andy Ogles of Tennessee said he was “unwilling to give Biden a blank check.” His emerging faction is being called irresponsible and worse.
But who’s really irresponsible? This small group of Republicans who want to reintroduce fiscal discipline or the Biden administration and congressional Democrats, who have been borrowing and spending like drunken sailors for two years. Since President Biden’s inauguration alone, the national debt has soared by over $3.6 trillion.
Was this spending responsible after $4.4 trillion that had already been borrowed and spent between February 2020 and January 2021 as part of a necessary and sufficient response to the pandemic and the ensuing economic shutdown? Many economists warned that Mr. Biden’s first spending initiative, the $1.9 trillion American Rescue Plan, was unnecessary and would unleash inflation—and it clearly has.
It’s hardly irresponsible to suggest that we return to fiscal sanity. Indeed, any increase in the debt ceiling should be matched by an equal reduction in this slew of post-pandemic domestic spending.
Yet the Biden administration’s irresponsibility in its domestic spending isn’t the primary reason it should be reversed.
Amy is an American who lived overseas for a significant stretch of her childhood, before returning to the U.S. for college. After graduation, she left again to attend graduate school.
Along the way, she met and married a European, who had hopscotched Europe and then traveled to the U.S. in his career pursuits.
Now, Amy and her husband live and work in Berlin.
The couple seem citizens of the world, their lives an idyl of globalism and their horizons limitless in an interconnected and interdependent international system.
Yet, today, we are seeing more of the downside of globalism. Beware any phenomenon embraced so passionately that it becomes an “ism.”
After an unexpectedly hawkish Federal Reserve raised interest rates by 75 basis points for the third consecutive time last week, all eyes were on markets and the economy. Few, however, paid attention to the effect persistent inflation and higher interest rates will have on Uncle Sam.
September 30, 2022
That’s surprising. Gross interest expense on the national debt hit $88 billion in August according to the Monthly Treasury Statement. That’s a stunning annualized rate of $1.06 trillion. Interest on the national debt is exploding and heading toward what economists refer to as a “doom loop”—the vicious cycle in which the government’s borrowing to pay interest generates yet more interest and yet more borrowing.
The August numbers barely reflect the impact of the Fed’s interest-rate hikes between March and July, much less last Wednesday’s increase and the additional 1.25% by year’s end implied by the Fed’s new guidance.
The Fed’s more-hawkish guidance calls for “higher rates for longer,” even if it brings on recession.
Not only are rising interest rates driving up federal interest expense dramatically; inflation is propelling growth in government spending on Social Security benefits, Medicare and other government healthcare programs.
Naturally, if we do slip—or plummet—into a serious recession, federal income tax revenue will erode. Even before recession, the last nine months of declining stock and bond markets virtually assure an almost complete collapse in capital-gains-tax revenue.
The national debt is working like a cancer sapping the nation’s long-term economic vitality.
Recently, an assistant school principal in Greenwich, Connecticut was caught on video avowing that he hires only progressive teachers. He explained that he won’t hire Catholics because they are too rigid, nor older teachers since they are too set in their ways, for him to be able to bend them to his mission of progressive teaching.
In Greenwich, he is probably an outlier. I live in Greenwich, and I have a second grader in the school system. He has had two great teachers and is just starting with a third of apparent great promise. Yet, most of the progressive education mischief occurs in higher grades, so I will reserve judgment.
The reality is that this is not a Greenwich issue. It is a national issue, more precisely a Beltway issue. The national teacher unions headquartered in Washington DC and the Biden Administration are very clearly pushing a left-wing agenda. The unions and Biden are doing everything possible to inject critical race theory (CRT) into the nation’s public schools, despite all their protestations to the contrary.
The Federal Reserve’s policies of increasing interest rates and quantitative tightening—reducing its $8.9 trillion balance sheet—will increase the volume and cost of federal government borrowing, slamming the federal budget and exposing the consequences of decades of deficit spending.
The impact will be felt even without a recession, but if the economy does contract, the government will have limited capacity to spur a recovery with fiscal stimulus.
Since February 2020, publicly held U.S. Treasury debt has exploded, growing from about $17 trillion to $24 trillion. Almost half of the increase has wound up at the Fed, whose Treasury holdings have ballooned from $2.5 trillion in February 2020 to $5.8 trillion.
Quantitative tightening is a big initiative. In May the Fed announced plans to reduce its Treasury holdings by $330 billion by the end of the year, and by $720 billion annually thereafter until its balance sheet shrinks to a yet-to-be-determined size. The Fed can reduce its balance sheet, but that doesn’t mean the federal government can reduce its balance of outstanding debt.
Investors are painfully aware of the plunge in stock and bond markets so far in 2022. Are federal and state officials aware of the damage plunging markets will soon do to public budgets and finances? Tax revenue from capital gains is about to fall off a cliff.
May 17, 2022
The Monthly Treasury Statement for April indicates that capital-gains tax revenue reached record levels in 2021. The markets are telling us capital gains will shrink dramatically in 2022.
If what the statement and the markets are signaling is correct, the reversal of fortune for federal tax revenue could be as much as $250 billion. In states like New York and Connecticut and others which are heavily reliant on individual income taxes, the reversal could be devastating.
