The presidential election has brought the issue of the federal budget deficit back into focus as markets weigh the impact of another Biden or Trump administration on government revenue and spending.
A week before last Thursday’s presidential debate, the Congressional Budget Office updated its projections for US debt and deficits.
The CBO’s new estimate The deficit for fiscal year 2024 is now $1.9 trillion, up from $1.6 trillion presented in February and about $1.7 trillion from 2023.
While the 2024 figure is less than the $3 trillion peak of the pandemic period, the $1.9 trillion figure almost matches Russia’s total GDP. The World Bank estimates $2 trillion By 2023, it will become the 11th largest economy in the world.
One reason for the projected deficit increase in 2024 is to account for emergency spending that went to help Ukraine fight Russia, the CBO said. Other emergency allocations went to Israel and US allies in Asia.
Meanwhile, the U.S. deficit dwarfs other major economies such as Mexico ($1.79 trillion), Australia ($1.72 trillion) and South Korea ($1.71 trillion).
For now, financial markets are focused more on inflation data and when the Federal Reserve will cut rates. But that doesn’t mean there aren’t risks of expanding deficits and debt.
Bill Dudley, former chairman of the New York Fed told Bloomberg Television On Wednesday, stable trends always come to an end.
He also warned that the situation could soon go south. For example, if bond markets begin to hold off on buying Treasuries, interest rates will rise to attract more demand. This leads the government to pay more for debt servicing costs, which further adds to the deficit.
„So the feedback loop here can be quite vicious,” Dudley said. „Knowing the time is a difficult thing.”
U.S. Treasuries have seen less demand in some corners of the world market as Western sanctions on Russia have prompted other countries to move away from dollar-denominated assets.
In addition, debt issued at low rates is now being transferred to higher rates, so debt service costs are rising faster than total debt, Dudley said.
The election and its aftermath can be a catalyst. Among A Wall Street Journal Report Trump’s allies have drawn up plans to erode the central bank’s independence, saying an election victory could raise concerns that the central bank could monetize U.S. debt by buying more Treasuries and fueling inflation.
Dudley pointed out that gaining control over the central bank is not easy because regional bank governors are not appointed by the White House, and central bank governors have staggered terms.
„That said, taking control of the central bank, an attempt to reduce the central bank’s independence, could be the only spark that rattles the markets,” he said.
„Oddany rozwiązywacz problemów. Przyjazny hipsterom praktykant bekonu. Miłośnik kawy. Nieuleczalny introwertyk. Student.