Washington Insider-- Tuesday

National Debt Concerns Grow

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

FY 2021 Ag Spending Approved, But Package Faces Veto Threat

The House on Friday voted 224-to-189 to approve a $259.5 billion four-bill measure consisting of the Agriculture, Interior-Environment, Military Construction-VA and State-Foreign Operations bills.

The package includes $37.5 billion in emergency spending that Republicans and the White House contend busts the budget caps deal reached last summer and contains numerous policy riders they labeled "poison pills” which were factors behind a White House veto threat, including blocking food stamp restrictions for able-bodied adults without children.

The four House bills will now go to the Senate where they are likely to sit until after the November 3 election, at the earliest.

US-China Talks On Progress of Phase One Agreement Up In Air

The head of China's trade negotiating team, Vice-Premier Liu He, and U.S. Trade Representative Bob Lighthizer, are expected to hold talks in August, the South China Morning Post (SCMP) reported, echoing prior reports from other media and including remarks by Lighthizer earlier this month.

The meeting will be “an important inflection point” to allow both sides to assess the progress of the deal, a source told the SCMP.

However, if because of the prevailing tensions between Washington and Beijing, “there was less of an appetite for engagement at the moment,” the two sides might agree that a telephone conversation between Lighthizer and Liu on May 8 had satisfied the “meeting” clause of the deal, the source said.

Washington Insider: National Debt Concerns Grow

The Hill is reporting this week that a group of Senate Republicans are raising red flags over the rapid expansion of the Federal Reserve's balance sheet. They are raising concerns that this could impact interest rates, the strength of the U.S. dollar and the overall U.S. economy “before colleagues realize it's a serious problem.”

The Hill says these worries are being led by Sens. Rick Scott, R-Fla., David Perdue, R-Ga., James Lankford, R-Okla. They show that opposition to passing a stimulus bill that exceeds $1 trillion is spreading in the GOP conference beyond Tea Party stalwarts such as Sens. Rand Paul, R-Ky., and Ted Cruz, R-Texas.

In addition, as deficit concerns go mainstream in the Senate GOP conference, pressure is rising on Senate Majority Leader Mitch McConnell, R-Ky., to take a hard line with the administration and Senate Democrats in the relief negotiations.

The stakes of the current talks are high, especially since McConnell is up for reelection against a well-funded Democratic opponent. He wants to deliver for his state but also to avoid a backlash from the conservative right, including Paul and Cruz, who have been highly critical of the projected cost of the next package.

Now more mainstream members of the GOP conference are joining in the alarm over the Federal Reserve's balance sheet, which has ballooned from $4.27 trillion on March 11 to $6.93 trillion on July 22. During that span, the Fed's ownership of U.S. Treasury securities has soared from $2.52 trillion to $4.27 trillion.

Some Republicans worry that with the U.S. debt climbing, they're seeing a drop off in demand in the world's financial markets for U.S. bonds, which could foreshadow climbing interest rates and a major problem for the economy down the road.

Sen. Scott said that he's also worried about the price of gold going up. He warned GOP colleagues during private discussions on the stimulus bill. Asked about the chances of dropping demand for U.S. debt, Scott says “it's already happened.”

Monthly statements from the Treasury Department show that debt held by the public jumped by $3.1 trillion from the beginning of March to the beginning of July. During that time, the Fed's outright ownership of U.S. Treasury securities climbed $1.74 trillion. The Hill estimated that the Fed has purchased about 56 percent of the Treasury debt issued in March, April, May and June.

“Sen. Scott is right that over this four-month period, more than half of the increase in debt held by the public was purchased by the Fed,” said David Wilcox, senior fellow at the Peterson Institute for International Economics. He noted that most of the Fed purchases occurred during the height of the financial panic in March and April.

“This was a period of extraordinary dysfunction for a six-week period from mid-March to the end of April and during that period—yes, absolutely — it was the design of the Fed to purchase Treasury debt at an historically unprecedented pace,” he said. Wilcox noted that Fed purchases of treasuries moderated in May and June to a pace of “about $25 billion per week” and interest rates have remained low.

Still, some GOP senators worry that interest rates could ratchet up and catch Washington by surprise — which would require Congress to appropriate tens of billions of dollars more on an annual basis to service the debt.

Perdue, the former CEO of Reebok and Dollar General, said he's raised his concerns with Treasury Secretary Steven Mnuchin and National Economic Director Larry Kudlow.

“We've gone from $23 [trillion] to $26 trillion in debt,” he said. “I'm really worried about the potential impact here of another $1 trillion or whatever we end up with. We need to be very circumspect. Anything we need to do now needs to be very targeted,” he said.

Perdue worries the Fed balance sheet could grow to more than $13 trillion and said that he's raised the issue with Federal Reserve Chairman Jerome Powell. And, he said he was worried about muted demand for U.S. debt at a recent auction.

Like Scott, Perdue thinks the Fed had to step in and buy up treasuries to make up for diminished demand for U.S. debt in the financial markets. “The Fed stepped in and what that did is it kept interest rates low, artificially,” he said. “Because if you were to go to the market, supply and demand, you'd have to increase interest rates to get people to buy it.”

Bank of America Merrill Lynch chief investment strategist Michael Hartnett warned on Friday that growing debt and maxed out fiscal policy will cause a “great debasement” of the dollar. Hartnett wrote that erosion of the dollar is “underway as the default narrative for U.S. economy with excess debt, insufficient growth, and maxed-out monetary & fiscal stimulus.”

So, we will see. It is not surprising that concerns about growing interventions in the economy are raising risks, observers say. However, the coronavirus is still the main threat and Congress seems certain to craft another big relief bill -- in spite of growing discomforts about impacts on the economy. These are debates producers should watch closely as they intensify, Washington Insider believes.

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