- The Treasury quietly released data showing it would need to borrow $955 billion in 2018, and more than $1 trillion in the two subsequent years.
- The government's financing needs come as the economy is picking up escape velocity.
- Rising interest rates may undermine growth, and hamper the government's plans.
Don't look now, but the U.S. government needs to borrow more money at exactly the wrong moment — when interest rates are spiking.
Last week, in a development first reported by The Washington Post, the Treasury Department quietly released data estimating its 2018 borrowing needs would check in at $955 billion, then top $1 trillion in the next two fiscal years. Those sums are considerably higher than last year's $519 billion in debt issued, and an upward revision to estimates released by the Treasury in late 2017.
The federal government's voracious financing needs come at a time when it's already pulling in record levels of tax revenue, to the tune of $444 billion in October through November 2017.
The Treasury's projections are also in line with an analysis by the Wharton School at the University of Pennsylvania last year, which estimated that the GOP's tax cut would add upwards of $2 trillion in federal debt over the next decade.
Given the turmoil in markets and the broad-based tax cut just signed into law, the Treasury's timing arguably couldn't come at a worse time. Interest rates recently hit their highest level in four years, which have ricocheted across markets and prompted investors to sell everything in sight.
Meanwhile, the Federal Reserve is expected to begin tightening monetary policy, which will effectively raise borrowing costs even further. So what does it all mean?
The political calculations appear fairly straightforward. Democrats, who opposed tax reform with near unanimity, are expected to point to the government's surging borrowing, hammering away at that theme until the November midterm elections. Critics of President Donald Trump's economic policy will also point to the irony of his remarks as a candidate, when he suggested the government could inflate away its debt simply by printing money.
Conventional economic wisdom suggests that in the long term, Uncle Sam's burgeoning debt load will put upward pressure on interest rates and hammer the dollar (which has also taken a beating, in spite of soaring yields that theoretically should help bolster its appeal).
While printing money to erase debt seems like an easy solution, most economists warn it would put the world's largest economy on a fast track to hyperinflation and a devalued currency (think Zimbabwe and Venezuela).
A force multiplier behind Treasury borrowing is the cost of doing so is already at historically low levels — thanks to the Fed's ultra-loose, crisis-era monetary policy. In fact, the Mercatus Center at George Mason University points out that interest rates have been on the decline for more than three decades, and borrowing costs for new debt issues are at least 5 times lower than 10 to 20 years ago.
"Such dramatic declines in borrowing costs put the Treasury in the driver's seat when it came to funding deficits," noted William Beach, Mercatus' vice president for policy research, in a recent essay, noting that the average interest rate on public debt was less than 2.5 percent.
"Although the overriding consideration of the Treasury during the recession and recovery was simply funding the trillions in new debt, the low and declining average and marginal costs of doing so no doubt encouraged borrowing," Beach added.
As for the U.S. and its relentless borrowing needs, the stakes are high. Analysts point out that U.S. debt is on the rise at a time when the economy's trajectory is on pointing up. For Trump, soaring interest rates and greater government borrowing may conspire to undermine his lofty economic goals—especially his 3 percent growth target.
Indeed, last month the International Monetary Fund warned about the scenario currently unfolding in global markets.
The fund said that the near-term outlook was constructive, but said tightening financial conditions around the world "would have implications for global asset prices and capital flows, leaving economies with high gross debt refinancing needs and unhedged dollar liabilities particularly exposed to financial distress."