America is borrowing like it's in a recession. It isn't

Running substantial fiscal deficits during severe economic contractions is standard Keynesian doctrine: automatic stabilizers kick in, tax receipts fall, and public spending cushions the decline. Running a federal deficit approaching six per cent of GDP while the national unemployment rate sits near historic lows of 3.5 per cent, however, is an act of fiscal recklessness without peacetime precedent.

Full-Employment Profligacy

This unprecedented fiscal stance injects relentless nominal demand into an economy already operating near full capacity, working in direct opposition to the Federal Reserve’s monetary tightening. To clear this colossal debt supply without monetisation, sovereign debt markets must demand a substantial term premium. Bond investors will no longer accept wafer-thin yields when the sovereign is borrowing at full-employment like a wartime debtor.

Borrowing six per cent of GDP at full employment is an unhedged macroeconomic experiment that forces long-term yields higher and leaves the sovereign with zero fiscal ammo for the next genuine downturn.