Research note I received this morning.
“Two factors have so far held the US economy back from the brink of recession: the excess savings overhang and a truly rampant budget deficit
The former is a form of lagged fiscal stimulus, due to run out around year-end. The latter is coincident fiscal stimulus.
Both are responsible for driving Q3 nominal GDP +8.5%, or +$560bn. Government deficit spending (i.e. net increase in debt $852bn less $263bn increase in the TGA) accounted for +$588bn (105%) of nominal growth, with 93% of the funding coming via MMFs from the RRP, where only $1.1trn of MMF deposits remain.
The larger the deficit, the higher bond yields. However, the faster NGDP rises on the back of the deficit, the sooner excess savings realign with the economy’s natural demand for money balances and become exhausted.
By pursuing aggressive, peacetime deficits during the latter stages of a particularly mature business cycle (14 years, if you ignore the brief and rather artificial Covid lapse), the US government is crowding out the private sector and driving interest rates all along the curve to heights that render huge swathes of the economy unproductive. Thus, deficits now generate blowout GDP today, but recession later.
Strip out the deficit and the US private sector is revealed to have been in recession since Q3 2022. Either Biden keeps running a very high deficit ahead of the election, driving rates even higher, or the bond market vigilantes manage to restrain the Democrats, but then the pent-up recession will be revealed."