The presidential election has brought the difficulty of federal budget deficits back into focus as markets weigh the impact of one other Biden or Trump administration on government revenues and spending.
Every week before the presidential debate last Thursday, the Congressional Budget Office updated its forecasts for US debt and budget deficit developments.
The New CBO estimate The budget deficit for 2024 is now $1.9 trillion, higher than the $1.6 trillion forecast released in February and in addition higher than the deficit for 2023, which was around $1.7 trillion.
While the 2024 figure is below the pandemic-era peak of $3 trillion, a figure of $1.9 trillion is sort of equal to all the Russian GDP that the World Bank estimates it’s $2 trillion in 2023, making it the eleventh largest economy on the planet.
One reason for the rise within the deficit forecast for 2024 is emergency spending for Ukraine’s fight against Russia, the CBO said. Additional emergency funds went to Israel and US allies in Asia.
The US deficit now dwarfs that of other major economies, similar to Mexico ($1.79 trillion), Australia ($1.72 trillion) and South Korea ($1.71 trillion).
Currently, financial markets are primarily focused on inflation data and when the Federal Reserve will cut rates of interest. But that doesn’t mean that there aren’t any risks of growing deficits and greater debt.
Former New York Fed President Bill Dudley said Bloomberg TV on Wednesday that unsustainable trends at all times come to an end.
He also warned that the situation could quickly deteriorate. For example, if bond markets begin to draw back from buying government securities, rates of interest will rise to draw more demand. This will end in the federal government having to pay more to service the debt, further widening the deficit.
“So the feedback loop can be pretty vicious,” Dudley said. “The difficult thing is knowing when to do it.”
He added that demand for US Treasury bonds had fallen in certain parts of the worldwide market because Western sanctions against Russia had prompted other countries to hedge their investments in dollars.
In addition, debt issued at lower rates of interest is now being refinanced at higher rates of interest, in order that debt servicing costs are rising faster than total debt, Dudley said.
The election and its consequences may very well be catalysts. In the midst of a Wall Street Journal report However, Trump’s allies can have drawn up plans to undermine the Fed’s independence in the event that they win the election, raising fears that the Fed could monetize U.S. debt by buying more Treasuries and stoking inflation.
Of course, it is going to not be easy to realize control of the Fed, because the presidents of the regional banks will not be appointed by the White House and the terms of office of the Fed governors are staggered, Dudley stressed.
“However, the mere attempt to take control of the Fed and limit its independence could be the spark that shakes the markets,” he added.
