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President Joe Biden’s “build back better” spending bill seems to be dead — at least for the time being. But there is still plenty of spending coming down the pike. This raises an important question: how is the Federal Reserve going to simultaneously taper its bond-buying program and monetize all of this debt?
On Monday, President Joe Biden signed a massive military spending bill into law.
The 2022 National Defense Authorization Act (NDAA) authorizes $777.7 billion in military spending for this fiscal year. This ranks as the biggest military budget in US history, topping the $740 billion budget in Trump’s last year in office.
The spending bill includes $740.3 billion for the Pentagon, $27.8 billion for the Energy Department’s nuclear weapons program, and $9.9 billion for “Defense-related Activities Outside NDAA Jurisdiction.”
Biden initially requested $753 billion for the 2022 NDAA. Congress added the additional spending. According to Antiwar.com, “hawkish Republicans” pushed for the added funding, arguing that more money was needed to confront China. This goes to show that despite claiming the mantra of “fiscal responsibility” Republicans are more than happy to borrow and spend for their preferred programs and policies.
Ultimately, the additional spending received bipartisan support and there was very little opposition to the massive spending bill. The Senate passed the NDAA by an 89-10 vote. The House approved the measure 363-70.
Needless to say, the United States doesn’t have $770 billion to spend on defense — or anything else for that matter. These outlays will require more borrowing and more money printing.
The federal government is already in the midst of a pandemic of spending. The budget shortfall in November was $191.34 billion. That was 31.7% higher than the November 2021 deficit.
The Biden administration blew through $473 billion in November alone. That brought total federal spending to just shy of $1 trillion ($922 billion) through just the first two months of fiscal 2022. Spending so far in fiscal 2022 is about 4% higher than it was through the same period in fiscal 2021.
The US government depends on the Federal Reserve to enable its borrowing. The Fed purchases Treasuries on the open market. By inserting itself into the bond market, the central bank creates artificial demand for US government bonds. This keeps prices up and interest rates low. Without the Fed interjecting itself into the bond market, there would not be sufficient demand to fund all of the government borrowing at these low interest rates. Without the Fed creating artificial demand via quantitative easing, there likely wouldn’t be enough buyers. Without enough buyers, the US government wouldn’t be able to finance all of its programs.
But the Fed has an inflation problem. It has committed to tapering its bond-buying program and ending it by the spring of 2022.
So, how is this going to work? How is the US government going to finance this massive military budget, on top of all of the other federal spending, without the central bank’s big fat thumb on the bond market?
This is one of the reasons we’re skeptical of the Fed’s “war” on inflation. The US government can’t afford the higher interest rates. Its borrow and spend scheme depends on low rates and Fed debt monetization. Without it, the whole house of cards will begin to collapse very quickly. It’s almost certain that the Federal Reserve will pivot back to loose monetary policy in short order as government spending continues to run out of control.
You can certainly argue that defense spending is necessary and that the federal government should make cuts in other areas. But the fact of the matter is politicians in DC don’t ever cut anything. It’s always “spend more” — on everything — because we can always borrow more. And the Fed is always there in the background propping up the bond market and printing new dollar bills.
All of this government debt is also putting a drag on the broader economy.
Despite the lack of concern in the mainstream, borrowing, spending and debt has consequences. Studies have shown that a debt to GDP ratio of over 90 percent retards economic growth by about 30 percent. The debt-to-GDP ratio currently stands at 127 percent, according to the National Debt Clock. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC.
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