US Government Cash on Hand

The Federal Government is stockpiling cash in preparation for another crisis.

On 7/31/2020, the US Treasury had $1,763 bn ($1.76 trillion) in its checking account at the Federal Reserve Bank of New York.

 On 8/31/2020, the US Treasury had $1,705 bn ($1.7 trillion) in its checking account.  So the balance went down $58 billion.

During August 2020, it sold $1,652 bn of marketable securities and it redeemed $1,469 bn of marketable securities, for an increase of $182 bn.  (Source: https://fsapps.fiscal.treasury.gov/dts/files/20083100.pdf)

The August 2020 deficit was $198 billion.  If you add $58 billion to $182 billion, that gives you $240 billion, which more than covers the deficit.  There are other factors affecting the balance as well, that is why this doesn't add up.

Anyways on a cash basis, the US Treasury has plenty of it.  Even if for some reason it couldn't borrow money for an entire year, it would be able to pay all of its bills.

Question: The Treasury account at the FRBNY is a liability to the Fed.  Where does the Fed invest its assets?  Almost all of it is invested in US Treasury Notes and Bonds and in Mortgage Backed Securities.  The Treasury bills are mostly held by the public, with a small percentage held by the Fed.

If for some reason the Treasury needed more money, how could it get more?  It would sell $X billion of notes or bonds at an auction.  The amount that didn't sell to the public would be purchased by a primary dealer.  The Fed would then buy the notes or bonds from the primary dealer at a small markup.  So it is a circle.  In effect, the Treasury swaps its securities to the Fed in exchange for cash.

Is there a limit to how much of this swapping can occur?  No, except for the legal limit on the debt, which is currently suspended until August 1, 2021.  But Congress will just raise or suspend the debt limit again.  So in effect there is no limit.  

What is the end game here?  The government will never default on its debt.  It will also never pay it back.  The ratio of debt to GDP is irrelevant because the government can always borrow more.  It is a giant Ponzi scheme.  In the end, the dollar will be destroyed as a currency.  How?  By inflation.  It doesn't have to be hyperinflation, just regular inflation.  With the Rule of 72, if the inflation rate hits 6%, then the value of the dollar will drop by half in 12 years.  I would say that any inflation over this amount is a huge danger to the system.

The Treasury and Fed think that they can control inflation with higher interest rates and taxes.  Paul Volcker jacked up the interest rates to 20% in 1980 and the prime rate reached 21.5% in 1981, and this caused a recession and killed inflation.  He in effect drove the economy off the cliff.  So yes it is possible to control inflation with raising interest rates.  However, I think this a freak incident unlikely to ever occur again because this takes a huge political will ("giant brass balls") and a deep understanding of how the system works.  Nobody today would have the guts to do such a thing.  Also, the national debt was much smaller in 1980, it was only $900 billion, so the interest wasn't such a big problem.

So the real question is when will inflation reach the danger zone?  I don't know, but we can expect an economic recovery after the election, whoever wins, and then it could just take a couple of years, if the Fed doesn't proactively fight it, which they have said they won't.  So possibly by as early as 2023.  And then Medicare will run out of money by 2026 or even earlier adding fuel to the fire.

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Update: On 9/30/20, the Treasury had $1,782 bn in its checking account.