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The CPI and Budget Deficit

The WSJ reports the budget deficit for fiscal year 2023 that ends on September 30 will be $1.7 trillion.  The estimate is from the Congressional Budget office’s monthly report for August and the deficit is even worse than the headline. 

The deficit would have been over $2 trillion if it was not for the Supreme Court ruling on student loans, a ruling that produced which the CBO calls “outlay savings,” an accounting entry which fictionally reduced the deficit.

Perhaps the biggest news in the announcement is that for the first eleven months of the year the CBO says interest payments were $644 billion, up 30% from last year.   Interest payments will eclipse $692 billion in quick order, the amount the country spends on defense spending.

The Journal states a third of the current deficit is going to pay interest on money borrowed from pervious spending blowouts.

The soaring deficit comes despite a growing economy and before spending within the Inflation Reduction Act accelerates.  Total receipts are down 10%, year over year, partially the result of $106 billion in lower remittances to the Treasury Department from the Federal Reserve as the central bank’s interest expense rises above its interest income on its massive bond portfolio.

Moreover, there is interest paid on excess bank reserves which still amounts to over $3 trillion.  The Journal reports interest on these excess reserves will amount to over $23 billion alone in September.

Today the CPI is released.  It is widely anticipated that inflation will accelerate modestly for the remainder of the year.  The question is how much?

Oil is at the highest level since November.  Crude is unlikely to decline in the intermediacy for according to OPEC, “global oil markets face a supply shortfall of more than 3 million barrels a day during the fourth quarter., amid a period of record demand.”  

OPEC further reports world oil inventories, having depleted sharply this quarter, are set for an even a steeper drop of roughly 3.3 million barrels a day during the next three months.

Oil is the ultimate geopolitical weapon.  Following the murder of the Washington Post reporter Jamal Khashoggi, the Biden campaign and later the Administration labeled Saudi Arabia a “Pariah Nation.”  Saudia Arabia was further incensed with the Administration’s hard pivot back to Iran, Saudi Arabia’s arch enemy.  The hatred between the Sunnis and Shias dates to the 700s.

It is widely accepted US/Saudi relations are nearing a nadir with some suggesting the 1974 Petro Dollar agreement may soon end. [The US will defend Saudi Arabia if Saudi Arabia prices oil in dollars…an extremely beneficial agreement for the US, amplified by the dollar as the only reserve currency].

Saudi Arabia is already expressing its displeasure with the US via selling its Treasury holdings, down about 41% from 2020 levels.

How will this unfold?  At this juncture, the current policy is inflationary, inflation that will impact interest coverage of the national debt.

Speaking of the impact of inflation on the typical household, government data yesterday indicated inflation adjusted household income fell in 2022 by the most since 2010.  This was the third consecutive decline. 

Last year American families faced the largest annual increase in the cost-of-living adjustment in over four decades according to government statistics.

No wonder 70% of those polled disapproves of the Administration’s handling of the economy.

The CPI is released at 8:30 and the headline rate is expected to increase by 0.6%.  The core rate is forecasted to rise by 0.2%. 

Last night the foreign markets were down.   London was down 0.35%, Paris down 0.81% and Frankfurt down 0.82%.  China was down 0.45%, Japan down 0.21% and Hang Seng down 0.09%.

Futures are down about 0.20% ahead of the inflation data. The 10-year is off 3/32 to yield 4.30%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.