Treasury Secretary Janet Yellen is campaigning for the U.S. to raise its debt ceiling. This is code for Treasury can’t afford to pay down its debt and wants to issue new debt to pay down the old debt. Reducing fiscal spending is the answer, but Washington is used to having its cake and eating it too at the People’s expense. The recent outrageous $1.7 trillion bipartisan Omnibus spending bill is one such example. As for Yellen, why she chose to issue short-term paper in 2022 as rates climbed higher makes zero sense. Treasury should focus on issuing long-bonds during periods when interest rates are elevated.
How did we get in this mess? Former President Nixon took the U.S. off of the Gold Standard in 1971. That was the first step in creating this fiscal mess as it gave the U.S. the ability to print Dollars at will regardless of gold reserves.
Fiscal deficits as standard operating procedure. The U.S. regularly runs fiscal deficits and has done so every year since 2002. We print money to offset our deficits which further devalues the Dollar, making goods and services more expensive in the process (i.e. “price inflation”). The U.S. ran a $1.4 trillion deficit in 2022 (see chart at bottom).
Spending as the default crisis response. Washington has never met a crisis it does not capitalize upon. The fiscal and monetary response to COVID was a disaster (not to mention the health and social responses), as the U.S. took its National Debt from $23.2 trillion in Q1 2020 to $31.5 trillion today, creating the inflation bubble in the process. Hundreds of billions of Dollars will be spent each year on various COVID-related vote-buying programs that have since become permanent entitlement programs. On the monetary side, the Federal Reserve is working to unwind its awful behavior during 2020 and 2021 when it subsidized companies and markets through various lending schemes, stock and bond purchases and trillions of Dollars in QE – all outside of the Fed’s mission.
Why short-term financing? As interest rates started to climb, why didn’t Treasury take a pass on issuing short-term debt in favor of issuing long-term bonds to fund the Federal Government’s various wasteful spending/vote-buying programs? Pre-COVID (Feb 2020) the U.S. had $2.6 trillion in Treasury Bills (T-Bills) outstanding. T-Bills carry a maturity of 4-52 weeks. If you know interest rates are going higher, why would you ever issue short-term debt knowing it will have to be reissued at higher interest rates? It does not make financial sense. Yet, this is precisely what Janet Yellen did over the course of 2022, issuing short-term paper at elevated interest rates. Today, Treasury has $3.7 trillion of T-Bills outstanding. Thus, approximately 12% of the National Debt consists of T-Bills. That percentage should be zero.
Last but not least, the U.S. is bankrupt. The $31.5 trillion National Debt figure does not include various unfunded obligations such as Social Security’s unfunded liability ($22.4 trillion) and Medicare’s unfunded liability ($34.9 trillion). Thus, the real U.S. Debt figure is closer to $90 trillion.