Expect Federal Spending to Cool Down

February is in the books, and the numbers are out, so we can now look at total government spending for the month. By all measures, it was really quite impressive. In fact, it was downright huge.

Even though there were only 19 Treasury statement days in February, the federal government put up a record amount of spending: $459 billion in total spending. That eclipsed the prior one-month record of $443 billion that was hit last February.

The jump was due to the very high level of federal tax refunds that went out: $121 billion. As an aside, I am still wondering why all the inflation hawks and money-printing whistleblowers are nowhere to be seen. This is true money-printing, not the fake "Fed kind," so they actually have an argument here, yet they are seemingly completely unaware of it.

Ironically, the one-month deficit for February is now unofficially at $223 billion, but it could easily surpass the prior single-month record of $231 billion that was hit back in February 2012. I say ironically because the media have been all over the story of the shrinking deficit (I was forecasting the deficit to shrink more than a year ago), and even the White House has been celebrating this publicly. But those cheers may soon be drowned out by renewed criticism once everybody sees the numbers. Those budget numbers will come out on March 12.

Of course, the cheering over the shrinking deficit was misplaced to begin with. The deficit was a good thing, not a bad thing, and shrinking it only means the non-government's surplus is shrinking. Remember, as a point of logic and fact, government deficits add to the non-government's surplus. This must be true by definition, as one entity's "dis-saving" adds to another entity's savings.

You can see this very clearly in the chart below, which shows the government's "savings" and the private sector's savings. They are a mirror image of each other. When the government runs deficits, the private sector's savings go up (blue line), and when the government's deficit shrinks (red line), the private sector's savings go down.

Sectoral Balances

FRED

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Since savings equals investment (S=I), that means shrinking the government's deficit will result in a shrinking in investment and, hence, a slowdown in growth at some point, unless the private sector takes on more debt, and that can be sustained for only a while.

My aim today is not to give an economics lesson but to anticipate what is going to happen. February was clearly a bullish month, and I made that call early on and stayed with it.

On the other hand, tax refunds normally peak in February and start declining thereafter (expect March to have half the level of February, and expect April to have half the level of March), so the best news is already behind us, at least for the time being. That's why I'd be taking profits into any "Ukraine relief rally" that we experience, and one might be under way right now.

For the long term, I am still bullish, but I believe there will be better opportunities to buy, so it's best to keep some power dry if possible and wait patiently for those opportunities to present themselves.