The US government borrowed a record high amount of money in the first quarter of 2018 – $488 billion. That’s not an encouraging sign that the federal government will get its fiscal house in order anytime soon. The budget deficit is expected to exceed $800 billion this fiscal year and exceed $1 trillion by 2020, getting back to Obama-era levels of deficit spending.
Treasury’s borrowing in the first quarter exceeded its expectations by $47 billion. Borrowing in the second quarter of this year is expected to reach $75 billion, with borrowing in the third quarter expected to reach $273 billion. It will be interesting to see whether these figures will also be exceeded.
Part of the difficulty with borrowing so much money is that it will now be dependent on market demand. While the demand for US government securities is always robust, there is so much Treasury debt in markets nowadays that demand (at least at current interest rates) will be sated. And in an environment of rising interest rates, investors will undoubtedly expect Treasury to offer a greater incentive to borrow.
That highlights the danger of such massively growing budget deficits in an environment of rising interest rates. The federal government already pays well over $400 billion each year in interest rate expense, a sum that will only increase in coming years as interest rates continue to rise. And issuing trillions of dollars more debt will only compound that increase.
The last time the federal government ran trillion-dollar deficits it was in an environment of near-zero interest rates, allowing the government to issue new debt and roll over old debt at lower rates. Issuing more debt and rolling over lower interest rate debt at higher interest rates will dramatically increase government spending. Ultimately it will be taxpayers who foot that bill in the form of higher taxes in the future.
