The U. S. Fiscal Position

I found this post by David Goldman at Law & Liberty interesting. Here are some snippets:

The flood of federal spending has had a number of dangerous effects already:

1. The US trade deficit in goods as of February 2021 reached an annualized rate of more than $1 trillion a year, an all-time record. China’s exports to the US over the 12 months ending in February also reached an all-time record. Federal stimulus created demand that US productive facilities could not meet, and produced a massive import boom.
2. Input prices to US manufacturers in February rose at the fastest rate since 1973, according to the Philadelphia Federal Reserve’s survey. And the gap between input prices and finished goods prices rose at the fastest rate since 2009. (See Figure 3.)
3. The Producer Price Index for final demand rose at an annualized 11% rate during the first quarter. The Consumer Price Index shows year-on-year growth of only 1.7%, but that reflects dodgy measurements (for example, the price shelter, which comprises a third of the index, supposedly rose just 1.5% over the year, although home prices rose by 10%).

and

The Federal Reserve has kept short-term interest rates low by monetizing debt, but long-term Treasury yields have risen by more than a percentage point since July. Markets know that what can’t go on forever, won’t. At some point, private holders of Treasury debt will liquidate their holdings—as foreigners have begun to do—and rates will rise sharply. (See Figure 2.) For every percentage point increase in the cost of financing federal debt, the US Treasury will have to pay an additional quarter-trillion dollars in interest. The United States well may find itself in the position of Italy in 2018, but without the rich members of the European Union to bail it out.

The graph at the top of this post was sampled from that post. When you look at it closely you will see a clear inflection point in December 2017. My hypothesis is that the passage of the Tax Cuts and Jobs Act of 2017 in that month is not a coincidence.

I would add that there’s a difference between a commitment to run a trillion dollar deficit and a commitment to run a $5 trillion dollar deficit. The latter is worse. In a non-linear world I can tell you if it’s 5% worse, 500% worse, or 250,000 times worse but it’s worse. The risks of that could be mitigated with more narrowly tailored legislation but I honestly can’t see that happening as long as the only risks the House is interested in mitigating are the risks of contracting COVID-19 and the risk of not being re-elected.