The U.S. federal government published a December 2023 deficit of $129 billion, up by 52 percent from the previous year. The private sector recession is clear as expenses continue to rise while tax receipts decline. If we look at the period between October 2023 and December 2023, the deficit ballooned to a staggering $510 billion. You may remember that the Biden administration expected a significant deficit reduction from its tax increases and the expected benefits of its Inflation Reduction Act.
What Americans got was a massive deficit and persistent inflation. According to Moody’s Analytics Chief Economist Mark Zandi, the entire disinflation process seen in the past years comes from exogenous factors such as “fading fallout from the global pandemic on global supply chains and labor markets, and the Russian war in Ukraine, and the impact on oil, food, and other commodity prices.” The complete disinflation trend follows the slump in money supply, but the consumer price index (CPI) should have fallen faster if deficit spending, which means more consumption of newly created currency, had been under control.
December 2023 was disappointing and higher than it should have been. The U.S. annual CPI (up by 3.4 percent) came above estimates, proving that the recent bounce in money supply and rising deficit spending continue to erode the purchasing power of the currency and that the base effect generated too much optimism in the past two prints. Most prices rose in December 2023, and only four items fell. In fact, despite a large decline in energy prices, annual services (up by 5.3 percent), shelter (up by 6.2 percent), and transportation services (up by 9.7 percent) continue to show the extent of the inflation problem.
The massive deficit means more taxes, more inflation, and lower growth in the future.
The Congressional Budget Office expects an unsustainable path that still leaves a 5 percent deficit by 2027, growing every year to reach a massive 10 percent of gross domestic product (GDP) in 2053 because of a much faster growth in spending than in revenues. The enormous increase in debt will also lead to extremely poor growth, with real GDP rising much slower throughout the 2023–53 period than it has, on average, “over the past 30 years.”
Deficits aren’t a tool for growth; they’re tools for stagnation.
Deficits mean that the currency’s purchasing power will continue to vanish with money printing and that the real disposable income of Americans will be demolished with a combination of higher taxes and a weaker real value of their wages and deposit savings.
We must remember that, in the Biden administration’s estimates, the accumulated deficit will reach $14 trillion in the period to 2032.
This unsustainable level of fiscal irresponsibility will also lead to more massive money printing. The Federal Reserve will have to lead with larger federal fiscal imbalances than seen in crisis times, even considering estimates that assume no recession or crisis. So, if a crisis hits, the situation will simply explode.
Considering all these elements, it isn’t difficult to think of a Fed balance sheet that rockets from an already elevated 29 percent of GDP to 50 percent, and it'll still be lower than the balance sheet of the European Central Bank.
Readers may think that monetization of debt will be an uncomfortable but necessary measure to reduce indebtedness. However, we should have learned by now that Federal Reserve monetization only makes governments more fiscally imprudent. Public debt continues to reach new record highs both in periods of monetary expansion and in periods of alleged contraction.
The year 2023 proved that the central bank’s policy was only restrictive in name, as net liquidity injections and anti-fragmentation programs continued. Policy was restrictive for the private sector, especially small and medium enterprises, and families, not for governments.
The year 2024 will be even worse because the government won’t count on rising receipts and a doped economic recovery. Therefore, deficits are likely to surprise negatively again, which means more taxes and lower potential growth disguised with a new set of liquidity injections.
What does this mean for savers? Your U.S. dollars will be worth less, real wages will continue to show poor growth, and after-tax disposable income will decline. The only way to protect yourself is to find alternative real reserves of value, from gold to bitcoin, which will offset the monetary destruction that’s about to accelerate.
