Tuesday, May 12, 2009
Treasury today released April data on federal government revenues and outlays. The deficit in the past 12 months now totals $1.25 trillion, and as the second chart shows, revenues are collapsing while spending is soaring. Let's be optimistic and assume the economy is already beginning to grow again, but it's hard to see a recovery in revenues that is much stronger than what we saw coming out of the 2001 recession. What was then the "jobless recovery" is going to be replaced by a recovery that has to climb a wall of higher taxes. That means that revenues probably won't turn up meaningfully for another couple of years. Meanwhile, we know that spending is on track to reach $4 trillion next year. The amount of debt that will need to be sold over the next few years is thus absolutely staggering. It hasn't upset the bond market much, however, because there is still a lot of fear of the future out there, and bond investors are willing to accept meager yields on Treasuries because they are concerned that the alternatives—corporate bonds—will suffer from very high default rates because the economy will remain weak.
In the sometimes-circular logic of the bond market, then, the prospect of massive Treasury supply is being ignored as a threat because that same supply will bring with it a massive increase in taxes, which will in turn keep the economy weak for the foreseeable future, which will in turn keep inflation low.
Posted by Scott Grannis at 12:12 PM