As I indicated in one of this week’s posts, the times for half-baked measures are over. Joe Biden and his team are gearing up to the mother of all re-boots of the economic and financial systems. The health crisis is still ravaging the country despite the better retail sales numbers for January. Federal finances are in the toilet. Debt has been skyrocketing. And the economy has still little to show for as a whole. It truly comes down to one further shot at kitchen-sinking everything to resuscitate the patient.
Biden isn’t exactly blessed on parameters. His 12-month rolling budget deficit to January hit -3.48 trillion dollars. Due to the start of the pandemic effect in April last year we will likely see a worsening of the 12-month rolling number over the coming 2 months minimum. An eclipse of the epic 3.5 trillion number is almost a certainty, but will we accelerate toward 4 trillion one more time before a levelling off effect is to be perceived?
At the height of my own frustration about the US system sleep-walking against a concrete wall, I dared to claim that America’s national debt will hit 30 trillion before the next president gets inaugurated. Well, we didn’t quite make it. Debt currently stands at 27.9 trillion to be exact, but the deficit that is evidently spiralling out of control will make sure that the 30 threshold gets reached in due course this year.
It is equally evident that private markets will no longer be able to absorb what the US Treasury keeps on pushing out as new paper supply. As the foreign bid gradually retreats in fear of a looming currency crisis, the Fed stands no other chance than to commensurately increase its purchasing program. And so, the Fed balance sheet as of last week increased by 32 billion dollars from the previous week, to a new record of 7.44 trillion.
Estimates range from 1-5 trillion more that the Fed will have to print to counter the shortfall in new bond bids, to finance infrastructure and green deals, and to control the yield curve to keep things in check. This space has consistently argued its disbelief in a resurgence of inflation due to technological and demographic effects. But depending on how overboard Biden’s spending goes, it is conceivable that surging demand in commodities, bottlenecks in steel production, etc will cause a temporary lift in goods prices.
To be sure, I still trust this to be a short-lived phenomenon and for technology to blast on with productivity gains that will eradicate any substantial inflationary tendencies over the medium to longer term. However. the market may very well misconstrue the data’s message and give long-end yields a further boost that the Fed will be forced to contain. The fragility of the economic rebound will not tolerate 10-year Treasury yields of 2-3%, and the people in the ivory tower know this.
In any case, whatever Biden’s government does, it needs to finally provide a real and durable boost for the economy. All the money printing, the ramp-up in debt, and the deficit spending have clearly not provided the desired effect as probably best evidenced by the WEI, the Weekly Economy Indicator. The WEI is indexing 10 weekly indicators, such as initial jobless claims, continuing claims, adjusted income tax data, rail traffic, steel production, wholesale fuel distribution, or energy consumption.
The year-on-year numbers collapsed in March last year and have lingered in negative territory since. Admittedly, WEI has recovered sharply from the lows of -11.5 points to a current -2.25, but this is still to be read as a loss in GDP. However you twist and turn this, and whatever optimistic view one might hold about the economy going further into 2021, Biden needs to make sure he gets this right and possibly use a sledgehammer to crack that nut.
