A $711 Billion Fiscal Deficit After Only 3 Months Won't Push Long Yields Lower
The fiscal deficit is already $711 billion three months into the fiscal year. The Biden Administration continues to spend money and won’t be purged from office until January 19th, thus I expect the month of January will also carry a large deficit. I believe the probability of the incoming Trump Administration running at “breakeven” for fiscal 2025 is zero percent.
What do I believe the Trump Administration will do to reduce “Outlays”?
National Defense: the run rate on this line item will decline as the U.S. will no longer ship funds or weaponry to Ukraine. That said, this line item will likely exceed $1 Trillion in FY 2025.
Education: that $52 Billion run rate will decline as DOGE reduces expenses at the margin largely by eliminating Dept. of Education administrative positions at the Federal level.
Net Interest: I expect that the Fed will reduce Fed Funds prematurely to enable Treasury to issue new short-term debt at a lower yield. This will force long yields higher. Treasury will continue to fund the Government with Short-Term debt (Bills), thereby reducing Interest Expense on the Public debt. Forcing more short-term debt on the market will create undue risk. Fiscal policy needs to work to control expenses, which will get long yields down.
What the Trump Administration should do, but won’t do:
Restructure Social Security, Medicare and Health. These three Outlay categories account for 48% of Total Fiscal Spend through the first three months of the fiscal year. Eliminate these expenses and the associated taxes, and the U.S. can be solvent again. Until such time, the U.S. is an undeclared bankruptcy case and the Dollar will continue to work its way to zero - meaning prices will continue to move higher regardless of what the bogus CPI measure may tell you.
