The year is just getting started and US fiscal deficits already reached another record.
Now at its worst level in 70 years.
The current fiscal spending path will lead to record Treasury issuance this year. pic.twitter.com/HLCL2PrQqk
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
With the decline in tax revenues and other discretionary and non-discretionary outlays, the government had to issue $4.4 trillion of net new debt in 2020 to fund these programs.
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
In 2021, if the Fed decides to stick with the $80 billion/month plan, it would be 60% less than what they did las year.
The math does not add up.
Fiscal spending is likely to be significantly higher.
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
The Biden administration is now planning on a two-stage stimulus package: rescue and recovery.
The “rescue” will be close to $1.9T.
That needs to be passed in the coming weeks before unemployment benefit programs are exhausted of money.
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
There is, however, another important consideration.
Not only fiscal spending is surging but US Federal net receipts are also rolling over again.
As of January 2021, US federal receipts are down -3% on a year over year basis. pic.twitter.com/6kDKgvEztY
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
US banks?
Sure, they bought 17% of last year’s issuance.
They are loaded with Treasuries already.
In fact, banks now lend more to the government than to businesses and households by a record amount.
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
It must suppress interest rates to allow the government to run extreme fiscal deficits and continue to prop up the equity and bond market at record valuations while inflationary forces keep building up.
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
Throughout history, an increase in income tax rates tends to follow a period of large government spending.
It is only a matter of time until this becomes an even more discussed topic.
So far, today’s narrative is all about how big the fiscal stimulus is going to be. pic.twitter.com/L3KqetGNEC
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
Yes, the equity market did not have significant issues when tax rates were trending upward and reached 94% at the end of World War II.
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
Back to the Fed however:
We think it will have no choice but to increase its QE program significantly.
In such an environment, investors will seek hard assets for protection.
The issue is that a commodity boom is contributing to reflexive macro inflationary pressure. pic.twitter.com/dlRC6FMJNS
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
Lumber and plywood prices are not only near record levels, but they are also rising at their fastest pace since 1974.
Agricultural commodities, base metals, gasoline, natural gas, are all up over 20% YoY. pic.twitter.com/G5h0WtpsrO
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021
Similar to the issues we had after the Spanish Flu in 1919, inflationary pressures keep building.
Back then, consumer goods prices began to rise due to a raw material shortage problem.
— Otavio (Tavi) Costa (@TaviCosta) February 28, 2021