by Calculated Risk on 2/09/2018 09:20:00 AM

A few brief excerpts from a note by Merrill Lynch economists: The $1 trillion dollar budget deficit

The latest developments in Washington imply that the budget deficit will continue to swell in the coming years. The bipartisan Senate agreement would boost spending cap levels for defense and non-defense programs over the next two years by roughly $300bn. As a first pass at estimating the impact on the deficit forecast, we think it would [bring] deficits to $825bn and $1,070bn. This will translate to one of the largest budget deficits during an expansion and, by far, the largest when the economy is at full employment.
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The Senate agreement also suspends the debt limit and staves off a potential Treasury default, which we projected would occur in early March without an increase. The “suspension” of the debt limit does not set a new level for the amount of debt outstanding, but instead sets a date on which the debt limit will be reinitiated. Press reports indicate that the debt limit will be suspended until March 2019, which removes this issue until Congress gets beyond the mid-term elections in November. ...

What do higher deficits mean for the economy and markets? The first order impact is greater Treasury supply ... [Merrill] expect the Treasury will look to boost its bill financing and see risks to more near-term supply due to a higher cash balance. These developments further the view of our rates strategy team for higher Treasury rates and a steeper curve. For the economy, a higher deficit will boost near term growth, though it will also threaten to “crowd out” private investment.

The US had trillion dollar deficits in the fiscal years during and just following the great recession. Those deficits peaked at close to 10% of GDP; this deficit will be around 5% of GDP, but still very high during the later stages of an expansion.