Saturday , 28 May 2022

The U.S. Central Bank Between A Rock & a Hard Place – Here’s Why

It was just last fall that the debt surged above $27 trillion for the first time. In less than five months, Uncle Sam added another $1 trillion to its debt load – and there’s barely been a peep from the mainstream media – and there appears to be no end in sight to the borrowing and spending. [As such,] the U.S. central bank has worked itself between a rock and a hard place – rampant inflation or a crashing dollar.

To put the growth of the national debt into perspective,

  • the debt was at $19.95 trillion when President Trump took office in January 2017;
  • it topped $22 trillion in February 2019 and that represented a $2.06 trillion increase in the debt in just over two years;
  • by November 2019, the debt had eclipsed $23 trillion – and that was before the coronavirus pandemic put borrowing and spending on hyperdrive;
  • less than 18 months later, the U.S. government has blown the debt up by another $5 trillion and, if anything, the spending is accelerating;
  • the U.S. government ran a $735.73 billion budget deficit in just the first four months of fiscal 2021. To put that into perspective, that is slightly higher than the 2014 deficit and would rank in the top-10 highest deficits ever run
  • and we have another $1.9 trillion stimulus bill coming down the pike.

To add a little perspective to the massive U.S. debt, if the Treasury Department billed every U.S. citizen for their share, your bill would be $84,827 – and every taxpayer would have to fork out $223,000 to settle the national debt.

Despite the lack of concern in the mainstream, debt has consequences. Studies have shown that a debt to GDP ratio of over 90% retards economic growth by about 30%. The debt-to-GDP ratio currently stands at 129.72%, according to the National Debt Clock. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC. [Indeed,] according to a CBO report last fall, on the current trajectory, the size of the national debt will be nearly double the size of the US economy by 2050.

…There seem to be increasing expectations on Wall Street that faster than expected economic growth thanks to stimulus will force the Federal Reserve to tighten monetary policy faster than expected but this seems highly unlikely given that the central bank has to monetize all of this debt. In effect, that means more bond purchases and more money printing.

The Federal Reserve makes all of this borrowing and spending possible by backstopping the bond market and monetizing the debt. The central bank buys US Treasuries on the open market with money created out of thin air (debt monetization). This creates artificial demand for bonds and keeps interest rates low. All of this new money gets injected into the economy, driving inflation higher.

The Fed expanded the money supply by record amounts in 2020. The Federal Reserve now holds $4.7 trillion in US government bonds, a record 17.5% of all US debt. The Fed’s share of US debt load exploded from 9.3% in Q1 2020 to its current level.

The U.S. central bank has worked itself between a rock and a hard place:

  • It has to print trillions of dollars to monetize the massive deficits but that is causing inflation expectations to run hot. That is putting upward pressure on interest rates.
  • You can’t have rising rates when your entire economy is built on debt, [however, so] the only way the Fed can hold rates down is to buy more bonds,
    • which means printing more money,
    • which means even more inflation – a vicious cycle.

At some point, there is a fork in the road and the Fed will have to choose:

  • If they step up and address inflation and let rates rise it will burst the stock market bubble and collapse the debt-based economy,
  • [If they] just keep printing money it will eventually crash the dollar.
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