The U.S. Government is Spending like Drunken Sailors. What Will a Recession Bring?

Last week, the U.S. Treasury Department issued its “Monthly Treasury Statement.”

The federal government ran a $208 billion deficit in May 2019, a record deficit amount. I will note the Treasury Department did put in bold that May normally runs a deficit because of a lack of taxes due, but this amount was a record for May.  For the 2019 government fiscal year, which runs from October 1, 2018 to September 30, 2019, the deficit is $739 billion.  The big tax month of April has passed, so expect this deficit number to do nothing but climb for the rest of fiscal 2019 (and beyond). 

I didn’t hear nary a peep from any republicans about spending.  Is anyone talking about spending cuts?  Oh, wait, that only happens when a Democrat is president. 

Keynesian economic theory posits that governments should run deficits during challenging economic times and pay down debt during good times.  In oversimplified terms, the government should stimulate demand during a recession and moderate its spending when a recovery occurs.  They’ve got the spending part down well; I don’t think anyone in Washington D.C. understands the term “moderate” in either its noun or verb form.

I don’t know why or when, but the sugar high will end.  This time is not different.  To paraphrase Margaret Thatcher, “Unlimited spending is great until you run out of other people’s money.”  The US has a huge benefit because the dollar is the reserve currency in the world.  Southeast Asian countries are talking about banding together and creating their own currency.  While that currency might not work, any threat or perceived threat to the dollar as a reserve currency could hinder the US’s ability to borrow.  If that happens, a recession is not far behind. 

(Non-paid endorsement:  This blog was inspired by Grant’s Interest Rate Observer.  A link to the free service is attached.  If you like economics and markets, this is a must read, as is the subscription service.  Unlike Joe Biden, I try to properly source my materials.) 

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