Risk for the dollar: US budget deficit is highest since 2012

In fiscal 2019 (ended September 30), the US budget deficit reached its highest level in seven years. According to preliminary data, the expenses of the US treasury exceeded revenues by $ 984 billion. This is stated in the report of the Congressional Budget Office.

“Regarding the size of the economy, the deficit amounted to 4.7% of GDP, which was the highest value since 2012. 2019 was the fourth consecutive year, when the deficit grows as a percentage of GDP, ”the department notes.

In many ways, the record US budget deficit is associated with high spending on social programs and the consequences of Donald Trump's tax reform. This was said in an interview with RT by the investment strategist of BCS Premier Alexander Bakhtin.

“A significant contribution to the increase in the budget deficit continues to be made by such social programs as Social Security, Medicare, Medicaid. In addition, as a result of Trump’s reform, tax revenues were significantly cut, while spending continued to increase, ”Bakhtin added.

Even during the 2016 presidential race, Trump promised to ease the tax burden on business if he wins the election. At the end of 2017, the head of the White House signed a law to reduce income tax for American companies from 35% to 21%.

As expected, this measure was to become one of the drivers of economic growth. According to Trump, after tax cuts, companies would start to get more profit, increase salaries for their employees and thereby increase economic activity in the country. However, in fact, corporations chose to keep their increased profits, experts say.

“Companies got the opportunity to earn more through exemptions, but they are in no hurry to increase salaries for employees, which is why the economy did not accelerate, and the budget loses almost $ 1.5 trillion a year,” an expert at the Academy of Financial Management explained in a conversation with RT and investments by Gennady Nikolaev.

According to the analyst, as one of the solutions to the problem, the authorities are considering reducing government spending on health programs for the needy and social security. However, such actions may adversely affect the country's economy.

“Judging by the draft budget for 2020, the United States plans to cut spending on social state programs by almost $ 2 trillion, while, for example, the military budget will not change much. Considering that in the near future the White House is unlikely to decide to reduce defense spending in favor of the needs of ordinary citizens, the risks of a crisis arise due to the huge load of social obligations on the budget, ”Nikolaev explained.

Debt spiral

To cover the budget deficit, the US Treasury Department issues special treasury bonds (treasuries). American and foreign investors buy securities and receive a stable income on them. In other words, treasury holders lend their money to the American economy. These funds are used to pay off the budget deficit.

“The deficit is financed in the usual way for the States - by increasing the public debt. Now it amounts to more than $ 22.8 trillion and is increasing by about $ 2 million every second. On average, each US citizen has over $ 50 thousand of public debt, ”Mark Goikhman, head of the CFT analyst group, explained in an interview with RT.

However, in the long run, the growth of public debt only increases the burden on the country's budget. According to Alexander Bakhtin, the need to service growing debt requires new cash injections and further exacerbates the deficit.

Money conveyor

In mid-September, the growth of the budget deficit provoked the so-called liquidity crisis in the US economy. So, banks are faced with a shortage of free money.

As explained to RT, Saxo Bank chief currency strategist John Hardy, recently foreigners have become less likely to buy treasuries, so American banks themselves had to actively buy government bonds. As a result, reserves of credit institutions began to gradually deplete, and on September 16, at the height of tax payments, banks did not have enough money to buy treasury securities.

The US Federal Reserve immediately intervened in the situation. According to the Federal Reserve Bank of New York, which is part of it, the regulator printed $ 128.2 billion on September 16 and 17 and urgently poured funds into the financial system. The last time the Federal Reserve resorted to this measure back in 2008, during the global financial crisis.

“Since foreigners and foreign central banks no longer build up their reserves in the same volumes as before, the deficit should be financed by American depositors and banks. The emergence of a liquidity crisis and the need for Fed intervention showed that it is becoming increasingly difficult for the system to pay off the budget deficit, ”Hardy concluded.

Traditionally, the Federal Reserve issues new money and buys securities on it as part of a quantitative easing program. The regulator pursued such a policy from 2008 to 2015, and in total acquired assets worth $ 3.6 trillion.

Currently, the Fed has not yet announced the launch of a new full-scale program of quantitative easing. So, emergency infusions of money in September should have become only a temporary measure. At the same time, the regulator continues to pump up the economy with fresh dollars and has already invested about $ 185 billion over the past month.

According to Alexander Bakhtin, in the long term, such actions can increase inflation in the country and lead to a weakening dollar.

“If the Fed moves from interim measures to the format of a large-scale program of quantitative easing, the process will accordingly affect the dollar in favor of moderate easing. Also, a return to such monetary incentives to some extent may contribute to the acceleration of inflation in the United States, ”concluded Bakhtin.