Chart of the Month (July 2023)

25 July 2023
Monthly Charts

Chart Description

The chart above shows the US federal budget deficit from 1980 to 2022.
The bar chart shows the nominal dollar amount of the surplus/deficit each year.
The orange line represents the deficit as a percentage of GDP.
The deficit exploded higher to $3.13 trillion (~14% of GDP) resulting from the fiscal response to the pandemic.
The deficit was reduced by more than 50% over the next two years, finishing fiscal 2022 (Sept) at $1.4 trillion (5.4% of GDP).
According to the June Monthly Treasury Statement (not shown) from the United States Treasury, the deficit for fiscal 2023 (ending Sept. 30th) is estimated to be $1.57 trillion (5.83% of GDP).
The same June MTS report estimates the deficit for fiscal 2024 to be 1.85 trillion (6.5% of GDP).
The 2023 and 2024 estimates assume no recession and rising tax revenues.

Our Take

It is concerning that the deficit seems to be reaccelerating in a period of generally positive economic news. That does not align with what we saw during the recovery from the recessions ending in 2009 and 2001, where the deficit continued to decline as economic activity recovered and reliance on government spending slowed. It appears that fiscal policy (government spending) is attempting to partially replace what monetary policy is attempting to remove in the form of higher interest rates and less liquidity.

As always, it is impossible to predict what the future holds, but there is one thing that we know for sure. Higher deficits equal more government borrowing. The real question is, who is going to buy the increased supply of treasuries? There are two main potential buyers:

Individuals / Institutions / Foreign Countries

While global demand for US Treasuries remains robust, there has been a noticeable reduction in enthusiasm among certain sovereign buyers. Even with an adequate number of buyers, investors of all stripes expect increasingly greater rates of interest as compensation for funding the Treasury’s growing debt level.
Higher interest rates only compound the budgetary issues for the Treasury as the total interest cost of servicing the existing debt is expected to reach $897 billion by the end of September. That would make interest on treasury debt the third largest line item in the federal budget, ahead of defense spending at $771 billion.

Federal Reserve

Up until the summer of 2022, the Fed had been one of the largest buyers of treasury debt as they attempted to support the economy following the pandemic. Since June of last year, they’ve essentially become a net seller of treasuries to fight inflation.
The benefit of the Federal Reserve buying debt is that they can theoretically generate endless demand for government debt by “printing money.” With the stroke of a keyboard, the Fed can boost bank reserves and absorb any excess treasures that are issued. The downside, of course, is that this would reignite the inflationary fires that are already wreaking havoc on American families.

We will not attempt to use our crystal ball to predict the outcome. We will, however, make the observation that the options for dealing with a growing budget deficit (assuming no adjustment to spending) are limited, and neither of the alternatives listed above are permanent solutions.

JPS Financial, LLC is registered as an investment adviser with the SEC. All information is believed to be current and should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. All investments and strategies have the potential for profit or loss.

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