Government Won’t Run Out Of Money On June 1

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
May 23, 2023

IN THIS ISSUE:

1. Government Won’t Run Out of Money Next Week

2. Debt Default Looms A Week From Now, Or Does It?

3. Budget Deficits of $1.5 Trillion This Year & Beyond

4. Biden’s New Mortgage Policy Is A Bad Mistake

5. Markets Not Worried About A Debt Default… Yet

Overview: Government Won’t Run Out of Money Next Week

The news today is dominated by the fear that the US government will run out of money next week and be unable to pay its bills after June 1. The media is warning that the US could default on its debt for the first time in history.

That assumes, of course, that Republicans and Democrats don’t get their act together and compromise on a new higher debt limit by June 1, which I still believe is possible if not likely.

But even if the GOP and the Dems don’t reach a compromise by the deadline next week, it is still possible for the government to continue to operate and pay at least some of its bills beyond June 1. I realize this is not what we’re being told by the media and Treasury officials, and that’s why I’ll explain it today.

Hint: some key facts and figures are being ignored. I’ll tell you what those are below.

Debt Default Looms A Week From Now, Or Does It?

Treasury Secretary Janet Yellen has repeatedly warned that the federal government will hit the statutory debt limit as early as June 1, when the Treasury will be unable to borrow any more money to pay our bills.

She warns this will lead to a default on our debt for the first time in history. She is pleading with the politicos in Congress to put aside their differences and increase the debt limit.

But let’s look at some facts before we get too worked up about a debt default next week.

Before I get started, let’s quickly review where we stand on the debt limit. The US hit that limit – $31.4 trillion – on January 19, 2023. Since then, the Department of the Treasury has been undertaking a set of so-called “extraordinary measures” to find money in other places to continue paying our bills.

But the Treasury warns that those extraordinary measures will run out as early as June 1 next week. But the important thing to keep in mind is the fact that the Treasury will continue to receive new tax receipts after June 1 with which to pay at least some of its bills.

While the media seems to ignore this, the government will collect more than a trillion dollars over the next three months. It collected $638 billion in taxes in April alone. The one trillion+ dollars will be more than enough to pay the interest on the debt. And it will be enough to pay all Social Security benefits, Medicare and Medicaid bills, welfare checks and food stamps.

There just won’t be any money left for anything else. Nothing for the military, infrastructure, education, the environment, law enforcement or any other programs the federal government currently operates.

Graphic showing debt negotiation path

While the government will continue to receive tax collections throughout the rest of the year, every penny collected in taxes goes to pay interest on the debt, a category officially described as “payments for individuals.” Everything else is paid for with borrowed money, all of which is subject to the debt limit.

Budget Deficits of $1.5 Trillion This Year & Beyond

According to the US Office of Management and Budget (OMB), the US government will spend an estimated $6.2 trillion in FY2023. The government will take in only apprx. $4.8 trillion in revenues. That leaves a budget deficit of $1.4 trillion.

Since federal spending goes up every year, the Congressional Budget Office forecasts annual budget deficits of at least $1.5 billion over the next decade or longer. That means our national debt of just under $32 trillion today will swell to at least $47 trillion over the next decade.

Actually, that estimate is almost certainly too conservative. As you can see in the chart below, our annual budget deficits are projected to more than double over the next 10 years, raising the debt to much more than $47 trillion.

Chart showing U.S. budget and debt outlook

Will our financial system be able to handle a national debt of nearly $50 trillion or more? Will that much debt tank the stock and bond markets? Will interest rates soar? And what about inflation?

These are all serious questions, yet we don’t know the answers to any of them – for sure. What we do know for sure is Congress and the White House spend more money every year, and the debt will almost certainly reach the levels noted above, or more, over the next decade.

Is there a limit to how much debt the US can take on? I would think so, but then I would not have dreamed 10 or 20 years ago that we would have nearly $32 trillion in debt today – and the financial markets are still working in good order.

But can the markets handle increasing that $32 trillion to nearly $50 trillion over the next 10 years? I don’t know, but it looks like we’re going to find out.

Biden’s New Mortgage Policy Is A Bad Mistake

I have written about the following topic in recent weeks when the idea was first floated as a trial balloon by the Biden administration. Now it looks like they are going to seriously pursue it, so it bears mentioning again.

The Biden administration has decided it wants to try to narrow the “wealth gap” between the rich and the poor going forward. While that may seem admirable on the surface, it all depends on how you go about it. And Biden’s latest mortgage policy proposal is NOT the way to do it.

The new Federal Housing Finance Agency policy will force those with good credit scores to pay more for their mortgages each month, with those extra payments used to subsidize the loans of higher-risk borrowers. Experts say that homebuyers with credit scores of 680 or higher will now pay roughly $40 per month more on a home loan of $400,000, with those who make down payments of 15% to 20% hit with the highest fees. It amounts to a tax increase on the middle class, and it’s a bad idea in every way.

For starters, it is fundamentally unjust and absurd to impose a policy that punishes those who have acted responsibly, sacrificed and worked hard toward a secure financial future for themselves and their families.

But this new policy is more than simply unfair. It’s also deeply reckless. The 2008 financial crisis and mortgage meltdown offered a painful lesson in what happens when government intervenes to push those who cannot afford a home loan to buy one and to undermine the critical role that credit scores play in assessing a prospective borrower’s risk level.

For its part, the administration defends its policy on the grounds that it’s simply trying to close a gap in home ownership between higher and lower income Americans. The administration also anticipates some political gain through what is merely the latest of its many wealth redistribution schemes.

But while increasing opportunities for home ownership is a laudable goal, the right way to accomplish this is by taking steps to eliminate unnecessary regulations, reduce inflation, and bring down energy costs – not to subvert basic market principles to political considerations.

If political advantage is what the Biden administration is indeed expecting here, they may be in for a harsh surprise. The more Americans learn about this new policy, the more they are rightly outraged and insulted that the administration would adopt a plan that perversely punishes responsible behavior and removes Americans’ incentives to manage their finances wisely and prudently.

The administration should reverse course immediately. But don’t hold your breath.

Markets Not Worried About A Debt Default… Yet

Angst over a possible default by the U.S. government has increased since Treasury Secretary Janet Yellen informed Congress on May 1 that cash and extraordinary measures to cover its debt obligations could be exhausted by early June. The so-called “X-date” is earlier than anticipated because revenues from income tax payments in April were about one-third lower than last year’s.

Meanwhile, President Biden has warned about the consequences for the world if there is a default. They include a likely recession, stock market sell-off and hit to the US dollar. He contends it would be irresponsible for Congress not to enact a “clean” bill (no spending cuts) to expand the debt ceiling since it already has authorized federal spending for fiscal 2023.

Many economists concur that it would be a mistake for Congress to pare back discretionary spending to 2022 levels, as called for in the House Republican proposal passed on April 26. In testimony before the Senate Budget Committee, Mark Zandi of Moody’s Analytics claimed that if it were enacted, annual real GDP growth over the next 10 years would be only 1.6% compared with 2.2% with a clean debt limit scenario. In that event, nondefense discretionary outlays as a percent of GDP would be cut in half from 4% to 2%.

Despite these warnings, US financial markets have not reacted thus far. Both the stock market and bond market have fluctuated in trading ranges as investors are focusing on the likelihood that the Federal Reserve will pause in tightening policy. Another reason is that most investors believe the debt negotiations will go down to the wire and then a deal will be struck, as has typically been the case.

We’ll see how this turns out in the next few weeks. As discussed above, the government won’t run out of money on June 1, but it will not be able to pay all of its bills unless Congress acts to raise the debt ceiling. So, things could still get dicey just ahead.

All the best,

Gary D. Halbert

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