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US Deficit Hits $100 Billion in October

15 November 2018

President Trump’s tax cuts and fiscal stimulus were always going to provide a sugar hit for the economy, with higher levels of growth than would otherwise have been seen.

The downside to that stimulus was always going to be seen in rising deficits, and this week we saw a stark illustration of that, with the US Federal government posting a USD $100 billion shortfall for the month of October.

The number was actually largely in line with expectations, and was driven by an 18% rise in outlays, versus a modest 7% increase in revenues.

It helps to keep the size of deficits in mind when one sees reports about the impressive levels of US economic growth we are seeing, as the budget deficit is now running at circa 4% of GDP, an incredible number, though still less than half of what it was in 2010 when the GFC was in full effect.

What’s more alarming is the trend in interest repayments that the US Treasury is on the hook for, especially as rates in the United States continue to rise.

As per this chart from a blog published on the St Louis Fed website, interest payments are heading demonstrably higher, and are now on track to exceed USD $500 billion a year, up from close to USD $300 billion a year around the time of the GFC.

Federal Reserve Bank
This is despite the fact that rates are still substantially lower than they have been in the past, and highlights the sensitivity of US public finances to any increase in borrowing costs.

The trend is not pretty either, as the following Bloomberg table, which looks at outlays for the Federal Government, highlights.
 
Bloomberg Chart
According to the above table, servicing treasury debt could end up costing the US government in excess of USD $600 billion this year, more than is spent on the Defense and the US military. By 2023, the numbers is set to rise to USD $930 billion.

There is no easy way out of this, and it’s one of the reasons that the US Federal Reserve may end up needing to reverse course and start cutting interest rates, especially if a late cycle US economy falls into recession in the next year or so, as many analysts are warning of.
 
Jordan Eliseo
Chief Economist
ABC Bullion
Jordan
 
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