Taps Coogan, January 15th, 2021

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Let’s do some back-of-the-envelope math:

The US national debt increased by $1.2 trillion in fiscal year 2019. That was before Covid, when the economy was operating well and unemployment was at historic lows. Let’s say that $1.2 trillion is the baseline deficit for the US in a good year. That’s before counting any stimulus bills.

We have already passed one $900 billion stimulus bill in FY 2021 (the fiscal year runs from October 2020 to October 2021). Another $1.9 trillion bill is snaking its way through Washington. If it passes, just those two stimulus bills, plus a conservative baseline deficit of $1.2 trillion, will push the national debt up by roughly $4 trillion in FY 2021. The increase in the national debt in FY 2020 was $4.3 trillion.

For the sake of argument, let’s assume that there will be at least one more major stimulus bill in FY 2021. We haven’t started into infrastructure spending, student debt forgiveness, or a government option for healthcare yet. You can bet that we aren’t done sending everyone checks in the mail either. It’s going to be political suicide for any politician to resist sending voters more ‘free money’ whenever anyone in Washington proposes it.

What about tax increases? Unfortunately, one of the biggest lies in politics is the idea that taxing the super rich can pay for any of this. 100% marginal tax rates on all forms of household income over $422,000 (including short and long term capital gains), would only raise about $724 billion. That’s assuming that you could collect a 100% tax, which you could not for obvious reasons. Any realistic tax hike on the rich is going to raise revenue in the high tens of billions or perhaps low hundreds of billions of dollars per year, not more.

That puts the back-of-the-envelope increase in the national national debt for FY 2021 at at least $4 trillion and probably closer to $5 trillion.

In order to keep interest rates from surging in FY 2020, when the Treasury had to issue a net increase of $4.23 trillion of debt, the Fed had to monetize roughly $3 trillion. The private sector has never absorbed more than roughly $1.4 trillion in net new treasury issuance, minus Fed monetization, in a single year.

The Fed’s current QE-Infinity plan is running at $120 billion a month, which equates to $1.44 trillion a year. If the Fed wants to keep long-term interest rates pegged at the floor while the Treasury issues another $4 or $5 trillion of debt in FY 2021, they are going to have to monetize a whole lot more than $1.44 trillion. It’s impossible to know how much more but double the current pace seems like a good starting point. Triple the pace may be warmer.

If stocks ever drop 10% again, they’ll have their excuse to do it.

Welcome to the crack-up boom.

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