The federal deficit has become a front-page issue. These deficits generate a need for more taxes, so the Treasury Secretary recently suggested an increase in corporate tax rates as a starter. Other tax hikes will be considered, but the most immediate option to obtain the funding for the planned federal spending is to sell more US sovereign debt. It’s not just that the total amount of US debt relative to income is high , but the rate of growth at the margin is accelerating.
As Secretary of the Treasury, she will be seeking buyers of US bonds in the trillions of dollars, not just to cover this year’s deficit but also federal debt incurred years back that is set to mature this coming year. What started as a theory 75 years ago has now become the go-to band aid for a slowed economy, without any consideration of how the debt created in this process can itself slow the economy. And that’s what debt in these quantities ultimately does. American consumers living on personally financed borrowed money seem to have a better understanding of debt accumulation than politicians do.
But voters and their inclination to be debt free have been taken out of the equation of resistance to federal debt as they have been coopeted. As government bonds has funded the green Treasury checks, virtually all political resistance to spending, has dissolved for now. In turn, many recipients of federal checks are increasingly taking themselves out of the labor market, as their bills have been covered by Uncle Sam. The bond market pays close attention to this and it deters future willingness to buy and hold US Treasury securities.
This is no longer a perspective concern for the Treasury Department as the Financial Times reports that in the first quarter of this year, the total return on long duration US bonds was not just negative at -13.5% but the largest quarterly decline in total return since the inflationary l970s . These risks, will reduce enthusiasm for those bonds so it’s becoming a rational issue of whether the bond market will indeed provide the funding for the Biden proposals at previously low interest rates even if the legislation is passed by Congress. Additionally, don’t expect the tendency for higher yields from inflation and sovereign risk to be charged only on the net additional debt from the Biden proposals. Higher US interest costs will trickle down to all previously issued debt when refinanced after reaching maturity.
Since the average maturity on Treasury debt is just 6.5 years, this means it takes only about half a decade for past debt holders to be additionally rewarded with both inflation and sovereign risk premiums when refinanced at tomorrow’s rates. It’s been a long time since we have been here where there will be questions about the ability of the US Treasury to fund these proposed spending programs. Meanwhile, keep your eye out for the results of the weekly bond auctions to see if bond buyers are turning away from US debt, When consumers over-indebt themselves, they expect to be turned away from future loan requests and they realize they must devote a larger share of future income to work-off past incurred debt. Quite simply, past debt is a tax on future net income.
Incidentally, in case you are wondering, US debt on a per capita basis is conservatively estimated to be $70,000, or $280,00 for a family of 4.
Source: The Spellman Report