The need for money to support the federal deficit in the April to June period grew from earlier forecasts. The Treasury expects to issue $340 billion in net marketable debt, assuming an end-of-June cash balance of $280 billion. The borrowing estimate is $71 billion higher than announced in February 2010, Treasury said.
The figure includes $200 billion for the Supplementary Financing Program (SFP). The facility is used to move money from the Fed balance sheet to the Treasury’s. Econbrowser describes the SFP system this way: “Essentially the Treasury borrows on behalf of the Federal Reserve, and simply holds the funds in the Treasury’s account with the Fed.” The system takes reserve deposits out of the market and give the Fed a ready way to raise capital.
The troubling thing about the Treasury’s news is that the effort to raise money will have to stay aggressive. The department said that for the July to September 2010 quarter it expects to issue $376 billion in net marketable debt, assuming an end-of-September cash balance of $270 billion, which includes $200 billion for the SFP.
Between the two quarters, the borrowing totals $716 billion. Total Treasury needs for the federal fiscal year which ends September 30 will be as high as $1.8 billion.
The size of the borrowing raises the question of how much US debt the global capital markets will absorb without the Treasury needing to raise the interest rates it pays. China and Japan, the two largest holders of Treasuries, have been net sellers of American paper recently. The need for other nations to raise sovereign debt in increasing as the UK runs large deficits and the Eurozone nations bring in capital for the Greek bailout. Spain and Portugal will also need more money and will almost certainly have to raise money by paying historically high interest rates.
Sovereign debt is only a part of the demand for money. Low interest rates have encouraged large corporations to take on additional fixed income obligations, further stretching the market for capital.
The Treasury news renews speculation of what level of interest rates the US will have to pay to raise funds for its deficits and how high the debt service on the national debt will be several years from now. By some estimates America will be paying $700 billion a year in interest on its debt load a decade from now. That will undermine the federal government’s ability to fund its normal operations and cover entitlement programs such as Medicare and Social Security.
The President says that the deficit must be brought under control quickly and has formed the 18-member Commission on Fiscal Responsibility and Reform Obama says that “everything is on the table” to bring down US borrowing. That may be true, but very few members of Congress will want to run on a platform that includes cuts in such programs as Social Security. That means Senate and House support for deficit reduction will be hard to do.
Deficit spending will be part of US government finances for years, and changing that is an improbable goal.
Douglas A. McIntyre