It is possible that the U.S. federal government will borrow more this year than it will collect in taxes.  In other words, more than half of its expenditures will be financed through debt.  And to be sure, most of this debt will be financed by the Federal Reserve (the Fed) through new money creation.

The Fed’s balance sheet has exploded since the end of February.  It is up almost $3 trillion over the course of three months.  It has blown past the $7 trillion mark, and while it is slowing down, there are no signs of it stopping.

Tax collections by the federal government have almost seemed to become irrelevant.  Sure, they’ll take what they can get, but there are 40 million people who have filed for unemployment benefits.  These are people not paying any payroll taxes. They will not be paying income taxes, although many of them weren’t paying them anyway.  Businesses that have been shut down are not paying taxes because there are no profits.

Even if half of the unemployed people are back to work by the end of the summer, that is several months of tens of millions of people not paying taxes.  And if half return to work soon, that still leaves something near 20 million people who are unemployed.

That is the tax collection side.  It gets far worse when we look at the government spending side.  The big piece of legislation was the misnamed (on purpose) CARES Act. That is over $2 trillion right there for unemployment, business bailouts, and direct “stimulus” (among other things).  We will probably end up getting another piece of legislation with more direct “stimulus” payments. They will certainly stimulate the Fed’s balance sheet more.  We will probably see more corporate bailouts, and we may see some bailouts for state and local governments.

This is on top of the massive annual deficit.  During our supposed economic boom, the deficit was already projected to be somewhere around $1 trillion.  I don’t know what it will be now for this fiscal year, and neither does anybody else.  Maybe it will come in at $4 trillion.  We can be certain that the federal government will not be collecting $4 trillion.  It wasn’t collecting that much before March.

Stocks are one thing that are booming with the Fed’s balance sheet.  Amazingly, some indexes are not that far from their all-time highs. Stock investors just shrug off 40 million unemployed people.  They love the easy money from the Fed.  The bulls think that Fed inflation is more important than corporate profits. So far, they have been right, but I don’t think that will last.

Either way, tax money collected from dividends and capital gains will not be up.  Maybe it won’t be down as much as would have been expected two months ago, but these aren’t really major tax items anyway as compared to the total federal budget.

Have a Problem? Just Create More Money

Interest rates on U.S. government debt are very low.  The 10-year yield has been below 1% for several months now.

There are still investors in U.S. government debt.  People buy bonds in their 401k plan.  Other investors buy bonds.  Corporations buy bonds.  Insurance companies buy bonds.  Foreign central banks buy bonds.

I don’t know how much has changed over the last few months, but I can’t imagine demand has spiked that much.  People do look for safety during times of uncertainty, and U.S. government bonds are seen as safe, especially during a time where there isn’t a perceived threat of significant price inflation.

Still, the reason that interest rates have dropped so low isn’t because of massive demand from investors and foreign central banks.  The reason is because the Fed has driven them down, particularly with massive buying of debt.

So we still have all of the same entities buying debt, including private investors and foreign central banks.  But we have added the Fed into the mix with its massive buying.

It is important to remember that there are always loans that are maturing and being rolled over. I expect much of this is being financed by investors and foreign central banks, just as it was before.

But there has been in increase in the national debt by several trillions of dollars over the past few months.  While we don’t know the exact details, it is obvious that the Fed is financing most or all of this additional deficit spending.  There is a reason that the Fed’s balance sheet has exploded by nearly $3 trillion in just three months.

Congress acts as if there are no limits at all.  In a sense, they are correct.  The Fed can keep creating new money out of thin air.  Of course, the question becomes what the money will be worth.

I have discussed this topic long ago in terms of the Fed just financing the budget.  I have pondered the question of what would happen if the Fed just financed the entire federal budget and all tax collections were eliminated.

We actually aren’t that far from that reality now.  The Fed is financing the government more than taxes are at this point. I’m not saying that will last forever, but that is the reality today.

Imagine if, last year, someone had proposed just getting rid of all federal taxes and financing the whole budget through monetary inflation.  I’m sure someone in the MMT camp was saying this, but they wouldn’t have been taken seriously.  Anyone proposing such a thing would have been laughed at.  They would have been proposing (last year) for the Fed to create something like $4.5 trillion per year.

Meanwhile, that is our reality today.  The Fed may end up creating more than $4.5 trillion this year.  The only difference is that tax rates have not been reduced but spending has exploded more.  Some taxes are still being collected, especially from those still employed, but we have the massive Fed inflation on top of it.

As a side note, I recognize that nearly everyone pays some federal taxes, even when they aren’t working.  They pay for excise taxes such as on gasoline.  They may indirectly pay taxes on things that are priced higher because of tariffs and corporate taxes.  Of course, the biggest tax, which people will eventually feel, is the inflation tax.  Whether you call it at tax or not, it sucks up everyone’s wealth.

As a libertarian, I prefer to focus on the spending side of government.  This is really the best measure of government confiscating resources.  It doesn’t matter how it’s financed because the government is extracting these resources in some way.  Whether it is through debt and inflation or through direct tax collections, the government is consuming resources, which means it is misallocating resources.

At this point though, it is almost pointless to fight against massive government spending. We can blame Congress and the president, but they are really just doing what the people are asking for. They may not be asking for massive deficit spending, but most are not opposing it.

We have seen this in the past for a long time.  Polls will show that Americans oppose deficit spending.  But when they are asked what should be done about it, they don’t want taxes hiked and they don’t want their favorite programs cut. Many will say they would favor stopping federal foreign aid, but that is practically a rounding error at this point.

I don’t see any stop to the madness in spending until it is forced upon us by economic laws. As I have previously written, you can’t consume something until it has first been produced.  And central bank inflation does not create any new wealth.

At this stage, I might rather just have the Fed print money (digitally speaking) to finance everything.  We know the budget would have to be cut drastically if the government had to just rely on direct taxation.  So we are going to keep getting massive monetary inflation for a while regardless.  It might be better just to bring it on sooner rather than later.

We may finally reach the pinnacle of government madness when people start feeling and seeing the consequences of inflation.  They are already having their wealth stolen, but it isn’t as obvious now. They may see the price of food going up, but it isn’t rampant yet.  If we start getting general price inflation above 10%, maybe more people will call this whole thing into question.

But it will really come down to the actions of the Fed.  At some point, Fed officials will be faced with a choice of risking runaway inflation or telling Congress that the Fed will have to stop or dramatically slow down its financing of their spending.  I hope it is the latter.

I really don’t think the Fed wants hyperinflation.  I doubt that most politicians want hyperinflation.  The only alternative at some point will be a massive drop in government spending.  I am looking forward to that day.