Debt Limit

Well…I’m a bit behind so let’s play catch up. January, if you recall posted a $24B surplus which was welcome but smaller than January 2017’s $32B surplus. It was an odd month…with an extra business day and “extrordinary measures” ongoing since the debt limit was not raised until early February. All together, revenues were up 5%, but outlays were up 8%…so the surplus declined.

Now time for my “Extrordinary Measures(EM)” Rant 🙂 As you all know, EM allows treasury to hide certain kinds of debt…making them disappear from the balance sheet…so they can issue new debt in its place…using those cash proceeds to fund the government when we are bumped up against the debt limit.

Now…what’s the point of a “debt limit” that you can essentially ignore to the tune of $300B??…but that’s not what my rant is about. We’ve gone over it before, but the cash deficit is an extremely simple concept….we look at the change in debt and the change in cash over a given period, and that’s the cash deficit. So if in a given day(or month)…treasury issues $100B of debt (debt +$100B) and cash balances increase $50B, we would say that the cash deficit for the day was $50B. We don’t book the deficit until the cash flows out the door. This used to not be an issue, but since 2008, Treasury has carried cash balances between a low of $3B and a high if $715B, where as before they kept it pretty flat at around $25B. Bottom line…if we ignore changes in cash, we can understate or overstate deficit/surplus by hundreds of billions for a given month.

Back to the rant :)… EM essentially nukes this math. I can estimate it during EM, but it can be off by ~5B a month. So…WHat I have to do after EM is finished is recalculate the deficit from the start of EM to the end…..figure out how much I missed it by, then I just divide that by the number of days and plug in an adjustment….which drives me nuts. It’s not huge, but essentially is taints year over year variances for a year or so, and since we play this game every 18 months or so, it just drives the accountant in me nuts….rant off, and thanks for bearing with me:)

Now… to catch up…Real quick, let’s use the EM adjusted numbers…January improves a bit posting a $30B surplus and February is below:

February always has a massive deficit due to tax refunds, so while $240B isn’t a surprise it tops 2017 by $21B, and that’s more than a rounding error. We see that revenues are flat and outlays are up….remember that because it is likely to be the story of 2018.

And now let’s look at March:

Again, March is a big deficit month, so this isn’t a big surprise but $187B is $28B higher than last year. Pay attention guys….it might be time to start getting worried.

Revenues:

Recall January….unaffected by the tax law changes actually posted a good revenue month. February was flat YOY and now we have an actual decline. Looking at the year through 3 months 2018 is still holding on to its January lead but it is only $10B and +1.4%…..and apparently declining. Now, April is always a wildcard with tax day 4/15…it could save the day or blow a hole in the whole year…we’ll know more in a few weeks. Looking at the big picture beyond April, while my crystal ball is as hazy as ever, we now have a few data points that indicate the tax cuts are indeed reducing tax receipts….nothing huge, just a few percent probably….but that’s a material difference from the past where revenue growth was at least a few percent positive and able to somewhat blunt the deficit impact of growing outlays.

Outlays:

While revenues are at +1.4% and declining, Outlays are up huge at +5.8%. That may not seem so massive, but when the federal budget is $4.3T….that’s about +$250B a year, and without revenue gains to offset it it’s not hard to see how we could be knocking on $1T deficits by the end of the year and blowing past it in 2019, and that’s assuming business as usual….can we assume that with all the craziness going on? I guess we still have hope 🙂

Deficit:

Through 3 months we are sitting at $397B, $52B over last year, and as noted above, the problem is simple…revenue is up 1%, outlays are up 6%. We can swing that for a quarter, or even a year….but all it will take is a few years of compounding and …well…you do the math:)

Looking Forward to April:

April is tax month, so look for a big surplus to provide some temporary relief to our current $400B deficit through the first quarter alone. Last April we had a $206B surplus and that seems like a reasonable estimate again, but April can be wild, so +/- $50B to cover:)

Looking Forward 2018+:

I’ve been watching this series for long enough to know better than to get too excited over a few months of data, but my eyebrows are definitely raised by February and March revenue data. There are a few one off’s in there that make it look better than it really is, and +1.4% doesn’t look good at all. Now, I know this site is called the Daily Deficit, but the truth is I haven’t reported daily deficit numbers in a while…though I do still track them daily here.  

For years now, if you lined up the days of the week with the prior year, you could see that withheld taxes were edging up…just a few percent, a few tens of millions, perhaps a hundred million in a given day. This made sense…more people were employed, maybe making a little bit more money, so Uncle Sam got a little more each day. Now, for the first time since 2008/2009…this is not the case. Obviously we know why, and for those who got tax cuts that’s not exactly bad news, but I have to wonder if perhaps the end is getting near.

It’s no secret the US government will ultimately default on its debt….the on($21T+) and off balance sheet debt ($100T+??) is unpayable, and has been for a long time now…nobody wants to talk about it, but it’s true and indisputable. However….with interest rates near 0, and the deficit more or less stabilized at $500B +/-$200B…as recently as a few years ago it looked like the game could go on, if not forever, perhaps maybe a few decades more??

That equilibrium now appears to be on the brink of being nuked. If the above discussed rates hold, or even get worse, we could be blowing through $1T annual deficit by early next year and past $2T just 3-4 years later. I’ve been wrong before (and will be again) but I don’t think we’ll get too many years of $2T deficits in the bank before it all goes boom….not that this would be a bad thing….For those not foolish enough to lend Uncle Sam tens of trillions of dollars, post Bankruptcy USA might just be a good place to enjoy the American Dream!!

As always…stay tuned!! April’s going to be exciting so I’ll try to do a mid month update, but no promises.

Nothing really interesting about December’s $10B deficit, but we now have a total for 2017 which rang up at $710B, $13B higher than 2016’s $697B deficit. This is the highest annual deficit since 2012 topping 2013’s deficit by just $1B and is the second year in a row of increases.

Digging in a bit, revenues were up a solid 3.1% while outlays were up 2.9%, more or less cancelling each other out, leaving us with just a 2% increase in the deficit.  Looking at the Wayback machine, it looks like last January I eyeballed 2017 with a 4% increase in outlays and a 2% increase in revenues, which penciled out to an $800B deficit. Not a great estimate, but good enough I suppose. It’s hard to be happy about a $710B/Y deficit, but looking forward, it’s hard to imagine it gets any better from here.

2018 Forecast

We don’t want to think too hard about it, so on the outlays side, I’ll go back to the +4% growth, which is $170B for the year or $14B/month. Now the biggy…tax cuts. While they go into effect January 1, it’s not quite that simple…2017 taxes will still be flowing in through April 15th, and the withholding tables are unlikely to be updated before February, so calendar 2018 won’t quite get a full year of tax cuts showing up in the cash receipts. I’ve seen quite a few estimates all over the place, so lacking any data to do real analysis…I’ll just pick a nice round, and conservative number, and say cash receipts in 2018 will decrease by $100B, pulling revenue down from $3.55T in 2017 to $3.45T in 2018. Following the logic, this will be weighted in the second half of the year, and overall pencils out to about a 3% YOY decrease.

So…quick math…+170B outlays and -100B revenues puts the 2018 cash deficit at around $980B, $270B higher than 2017 and right back to knocking on $1T. Yikes!!that didn’t take long…maybe we should be happy it took them a year? Nah…I mean once you have $20T of debt, do another few hundred billion really even matter? I doubt it.

Default Near?

When will the US default and how?  The truth is that this can continue as long as Treasury can continue to issue a trillion dollars of new debt annually at ~2% rates to new fools, the Fed, algos etc… Don’t get me wrong…this debt can never be repaid…it will either be inflated away or officially defaulted on. Maybe that’s what the stock and housing markets are telling us….maybe they aren’t at high’s…the USD is just worth that much less and people are hedging against it’s decline by bidding up the price of tangible assets and companies that own them. Just a thought that’s been rolling around in the back of my head for a whle. Whenever it happens…I for one will not feel sorry for the blind fools who even for a second believed US debt was risk free.

As mentioned in the last post, a deal to increase the debt limit (technically suspend until December 8) was reached…supposedly between Trump and the Democrats, but that story seems a little silly to me, not that it matters.

So, last Friday, Treasury pulled all of the “Extraordinary Measures” (EM) IOU’s out of the coffee can and made them official, pushing the total debt outstanding up by $317B. Again, nothing shocking at all.

As I have complained mightily about in the past, these shenanigans nuke my simple cash deficit calculations, but I am able estimate them. Now that EM is over and the debt is once again properly accounted for, and I can now calculate it to the penny again. Over nearly six months of EM, my estimates were only off by $5.5B….or $1B per month, which was better than previous EM periods, though honestly nothing about my process has changed. What that means is that just last week I had the August YTD deficit at $460B….these revisions push it up to $465B….so no real material change….The 2017 deficit is pretty much in line with the 2016 deficit which was $476B through 8 months.

My thoughts on the debt limit….it is still just a really bad joke. I get the principle….but am still forced to see that it has failed completely so many times for so many years. And then of course…can we really even call it a debt limit if Treasury can then circumvent it using laws/rules passed by congress for six full months, and $317B? I’m in favor of scrapping the whole silly thing, but perhaps we should at least stop calling it a “debt limit”….maybe we should call it a “Red Line”…LOL (too soon??).

Here is the deal…the US government has a baseline deficit at the moment of about $600-$700B….same as last year. As it stands, this budget is “un-balancable” (probably a made up word 🙂 ), and therefore the debt is unpayable. Sure, we can roll it for a while, maybe a long while, but we can never pay it off.

In order to change the baseline above…. something drastic must change, probably on the spending side of the deficit equation. Nearly half of the annual spending can be attributed to just 3 things…Social Security, Medicare, and Medicaid at nearly $2T/Y. You simply can’t plug that $700B hole, or even make a dent in it with out materially changing these programs, and yet, not a peep. That’s why it pisses me off to hear the Republicans in particular pretend like they care about this issue….then come up with some crazy optimistic proposals about how they are going to “save” $500B….over 10 years. That’s not even worth talking about….if you care about the debt/deficit…come up with a plan to save $10T over 10 years…or don’t even bother trying.

One final thought….now that the EM cannon has been reloaded with a fresh ~$350B, don’t be surprised if the debt limit has in actuality been pushed out not just a few months, but possibly all the way out to next summer. The timing isn’t as good for Treasury this time around….last year EM went into effect just after the heavy tax refunds had gone out in February and just before the heavy tax payments of April. This probably would have got them well into October if the hurricanes Harvey/Irma hadn’t given them the cover they needed to extend it sooner. This time around, it will be much tighter. They may not make it through tax refund season without running out of cash, but if they somehow can make it to April when cash starts flowing back in they can probably make it through the summer again…I hope it doesn’t…watching this stupid game year after year is kind of a downer!!

Will we never learn? Without a lot of fanfare, the debt limit was reinstated on 3/15/2017 at $19.809T and Treasury instituted the infamous “Extraordinary Measures” (EM) to circumvent the law and give our politicians more time to make fools of themselves.

Extraordinary Measures??

First off…what are Extraordinary Measures?  For me, they are a huge pain in the rear. You see, calculating the “cash” deficit is actually a very simple exercise…we look at the change in cash balance, and adjust it for the change in debt…and voila!! So for example on 3/3/2017 the cash balance dropped by $22.080B and the debt decreased by $235M. Add them together and we get a daily cash deficit of $21.845B. Of course you can add up all of the revenue line items and subtract out the outlays….and come up with the exact same answer. Of course…I actually do that as well, but you don’t need all of that complexity to calculate the cash deficit. In any case, EM nukes my process, and while I can back into a decent educated guess, unfortunately I won’t have an actual number until these shenanigans are over. The margin of error is ~$5B a month, which actually isn’t bad, but still enough to drive the accountant in me a little nuts.

The mechanism for EM is actually quite simple…they take some parts of the debt…I can’t remember specifically off of the top of my head but things like federal retirement funds…and simply pretend thy don’t exist(a little at a time). This simple move lowers the official debt outstanding, allowing them to continue to issue new debt. When the debt limit is ultimately increased, they just pull all of the EM debt they were pretending didn’t exist back onto the balance sheet resulting in a huge one day increase. Last time we played this game back in late 2015 the result was a $339B increase, so it seems reasonable to think they can squeeze about $350B of EM this time.

How Long Do We Have?

Last time around the timing of the debt limit was the same if I recall…debt limit reinstated 3/15/2015, and EM used to get us all the way to the resolution in early November…so over 7 months. As I stated back then…the middle of March is just about the best possible time for a debt limit standoff because the huge outflows of tax refunds are pretty much behind you, and you are just a month removed from a huge inflows in April which as of late have been running in the ballpark of a $200B surplus. With an April surplus and $350B of EM…and getting to October/November again seems like a pretty solid bet.

Cheney was right…Deficits Don’t Matter(Anymore)

Here is what I know…the US debt/deficit is a massive problem. It will blow up, and there will be a lot of pain….maybe worse. This will happen…I am 100% certain of it. The window to fix it has now closed….I’m not sure it was ever really open. Could be this year…could be 20 years from now…but it will happen.  But since it’s going to happen, I’ve stopped worrying about it. Why should republicans who don’t care about the deficit and democrats who don’t care about the deficit fight over some measily $15B here or there…when obviously the American people don’t care about the deficit either? Just hours ago….the republicans plan the shoot down the much hated and relatively new entitlement(ACA…AKA Obamacare) went down in flames despite Republicans having the presidency and majorities in congress. This is the system that is going to fix $20T in debt…growing at ~1T per year indefinitely? Hah!!

My thoughts on the matter have changed a lot over the last few years as I have accepted this reality. Rather than worrying about it…we should just enjoy it as long as we can. As long as there are still suckers around willing to buy “risk free” US debt…let them!!  So this is my advice to Trump and the Republicans….stop pretending to care about the debt…we don’t believe you…you aren’t impressing anyone, and honestly nobody even cares anymore.  So forget about it and go big on things people do care about. Tax cuts, jobs, infrastructure,trade, immigration….heck maybe break up the medical industry that seems more interested in financially screwing us over every time we walk into an office or hospital than actually improving health.

So pass the silly debt limit increase or better yet just get rid of it….then get to work!!