As of 11/28/2012, 4.8T of the 16.3T of debt outstanding was classified as “IntragovernmentalHoldings”…a full 30%. It is my opinion that this is pure silliness. In reality, the internal debt is just an up to date tab of money that has been stolen and spent….primarily related to Social Security and government/military retirement funds. Here is an example. Let’s say that in a given month, the government collects $100B in Social Security taxes deducted from paychecks. If in that same month they pay out only $50B for Social Security benefits, the $50B balance is used by the general fund, and they pencil in a $50B liability on the federal balance sheet. An I.O.U. if you will…to ourselves. So the question becomes….can you really owe yourself money? I think not….here is another example.
Let us suppose that a bright young 22 year old with a University of Phoenix degree (and $50k of student loan debt) decides to employ a similar retirement strategy. Out of each paycheck, he sets aside 10% for his retirement….but them promptly spends it on pizza and beer. But not to worry…this bright young graduate diligently records these liabilities on his personal ledger as both an asset, and a liability. 45 years later, he reaches retirement with well over $1M “saved” He then goes on to enjoying his dream retirement right??? Of course not….because the very notion of owing yourself money is slightly moronic…. And yet here we are. The answer is NO!!
So what does this mean? Should we all breath a sigh of relief and simply write off 30% of the debt on our books. No on the relief…yes on the write off. The truth is…the internal debt has never really mattered, so admitting to ourselves what it truly represents doesn’t really change anything. As it stands, we have a structural deficit in excess of $1T per year and no realistic plan to materially change this. The truth is, that sometime in the future, both on and off balance sheet liabilities will be defaulted on one way or another. The sooner we realize this…the better.
As of 11/16, the US was $154B away from hitting the debt limit of $16.394T and had a cash balance of $27B. So…what can we expect in the upcoming month? Looking back at last summer’s battle gives us some clues. Sooner, rather than later I would expect the treasury to move to issue debt to build up cash and push us closer to the debt limit. If it was me…I’d issue $154B in debt tomorrow, effectively hitting the debt limit now, but still having a $175B cash cushion. That way, you force the issue now with a month or two of cash on hand rather than waiting until late December or early January. They probably will not be this blatant….they will (or at least should) gradually accomplish this over the next two or three weeks.
As we get closer and closer to the limit, the government will start to play games with the internal debt….effectively moving it off balance sheet, and exchanging it for public debt. This game gets them a little wiggle room… on 8/2 last year…the day the deal was reached, internal debt skyrocketed $114B…a pretty good guess of the size of the nut they were hiding. Assuming this trickery has already started a few weeks back when they announced “Extraordinary Measures” I will be adjusting my forecast a bit back from the 1/20 guestimate last week. Fortunately, the calendar gives us a hard constraint…in addition to heavy outflows of cash due to refunds….it looks like on 2/15 a rather large interest payment is due…in the $30-35B range if the past two years trend continues. So I’ll put it at 2/14…giving the feds a bit more credit for the level of trickery they have at their disposal. If somehow they make it past that, heavy outflows continue into March before picking up late March and of course into the April 15 Tax Day.
All that said, it does seem more likely at this point that a resolution is reached before things get as hot as they did last year. We’ll find out soon enough!!