Huge US Budget Deficit fear that the bond vigilantes will reawaken
The US government’s finances keep looking worse. The latest Congressional Budget Office projections suggest that it will need to borrow an added $400 billion this year to cover its budget deficit — and trillions more over the next decade.
Investors have plenty of legitimate reasons to worry about this trend.
The immediate effect on money markets isn’t one of them.
Fed is being very careful to ensure that banks have ample reserves to meet their liquidity needs, precisely to avoid a repeat of the 2019 turmoil.
The US is taking a big risk by running large and chronic fiscal deficits. The more it borrows, the greater the chance it’ll end up in a vicious cycle, in which government debt and interest rates drive one another inexorably upward.
It's impossible to know when investors will decide that such risks are too much to bear, as the bond vigilantes famously did in the 1990s. When it happens, it tends to be sudden and brutal.
This is the concern that should be paramount.
Bill Dudley Bloomberg 26 June 2024
People keep asking me, “When is the crisis you’re predicting going to happen?”
Reading that now, I see I was describing what I’ve elsewhere called a collapsing sandpile, or a “Minsky Moment.”
Debt is sustainable until it suddenly isn’t. Some event, some last grain of sand, triggers the hidden fingers of instability and it all collapses. And anything can be that trigger.
This is why debt crises are so destructive. By their nature, no one is prepared because no one sees them coming. A few expect them, yes, but they never know the timing.
https://englundmacro.blogspot.com/2024/06/people-keep-asking-me-when-is-crisis.html
The debate has shifted in favor of MMT. It’s less common to hear mainstream economists talk about soaring interest rates driven by bond vigilantes or national insolvency.
And it’s more common for people to understand that government deficits supply the non-government sector with net financial assets—i.e. the government’s red ink is our collective black ink.
Stephanie Kelton Newsletter 6 February 2022
https://englundmacro.blogspot.com/2022/02/the-national-debt-doesnt-matter-way.html
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