October 2013 Deficit Preview

While I suppose it’s all relative, October is kind of a dull month in regards to the deficit. It’s not a quarter, so no revenue surges to predict or Fannie/Freddie payday loans to analyze. We do have the backdrop of the government shutdown and the impending debt limit, but the shutdown probably won’t have a material affect on outlays…maybe a few Billion? The Debt Limit could get interesting, but I have to think it will be resolved by month end, and any federal worker back pay will have been paid in full.

I could be wrong about all of this, in which case so will be my forecast, but honestly, it’s going to be wrong anyway, so why add additional uncertainty? So, I’ll stick with the same ol’ playbook, guessing we see ~10% YOY revenue gains and moderate reductions in cost. For the record, let’s just say $225B of net cash revenues and $316B of outlays, good for a $91B deficit…which would be a material improvement over last year’s $123B October deficit.

Cash in hand as of 9/30 was $88B, so we would normally think there was enough cash on hand to get us to the end of the month, but I recall reading a CBO publication mentioning some intercompany cash true ups that happen in October that may increase intercompany debt by about $80B…which would require a paydown of $80B of external debt to stay under the limit. That would probably be offset by some additional “Extraordinary Measures”…according to the same publication, there were about $90B or so left in that tank. So…You have to believe that there is a good chance we make it to the end of the month, but getting past the heavy outflows of early November might be a challenge. Of course…a higher deficit over the month would pull forward the “default date”, while a lower deficit would push it out a few days. In the long run, it really doesn’t matter. I haven’t put out a FY 2014 forecast yet, but it will probably be in the $700-800B range regardless of whether we run out of cash on 10/17  or 11/3.

 

Reply to “Has the U.S. Treasury Already Exceeded the Debt Limit?”

Perhaps I’m a bit jealous here….that this guy got a Drudge link and I didn’t…but I give him a swing and a miss for not paying attention. The headline refers to the Daily Treasury Statement table III, which I happen to know something about. The author notes correctly how the debt outstanding, at $16.738T is now $39B over the 16.699T official limit. Busted…right!! Well…not really. You see, there is a small subset(about $30-40B) of the debt that is exempt from the debt limit…this is not new or newsworthy, it has always been this way…not just for the past 68 days….always.
Most of this exempt debt is related to the unamortized discount…currently at $32B. So…you are probably wondering….”what the heck is the unamortized discount?” Let’s take a 3 month T-Bill for example. Rather than issuing at say $100, then paying interest plus face value three months later, they are issued at a discount, say $99, then paid in full when due. That 1$ is the discount. So…while I now have an additional $100 face value of debt on the books, your accountant will say that you technically only have $99 of debt, and will incur $1 of interest over the next 3 months. That difference…currently $32B, plus a handful of other items are specifically excluded from the debt limit calculation. Why??… I don’t know…I suppose it’s in some regulation or law somewhere, but that’s just how it is, and has always been. Pointing that out now well…it really isn’t news to anyone who has been paying attention.
Now, that’s not to say there are not shady things going on….there certainly are….Mr. DeLegge just looking under the wrong stone. The real travesty is the use of “extraordinary measures” to essentially hide debt off of the balance sheet…probably another $100B or so over the next month. Then, when the debt limit is raised, and we all know it will be…this debt will magically, and nearly instantly be parked back on the balance sheet. Ta Da!! That magic trick deserves further scrutiny….the unamortized discount….nah…that’s just good accounting (for a change). So the answer is…No…they haven’t…yet…but they fully intend to….just not as obviously as you think.
So…if you want a real debt limit primer, read Debt Limit Recap Summer 2013 written by your truly without all of the glamour associated with a Drudge Link, but guaranteed to have at least twice as much credibility 🙂

Treasury Stockpiling Cash in Preparation for Debt Limit Showdown Round X??

I touched on this a bit back in January when the “No Budget No Pay” act was passed…effectively lifting the debt limit to infinity until 5/19/2013. Though I haven’t read the fine print (and have no plans too)…there seems to be a glaring loophole…What is stopping Obama from issuing enough debt 5/18 to make it through the rest of his term…say $4T or so.

The accounting is simple….debit cash $4T…credit liabilities $4T. Rather than hitting 5/19 with a $16.9T debt limit…it would be$20.9T…problem solved right? Well, honestly, I never expected them to be that brazen, and it wouldn’t surprise me if there isn’t some fine print in the law prohibiting such malarkey. However….surely there must be some wiggle room.

So I wasn’t so surprised when I glanced at the 4/30 DTS and saw that despite having a cash balance of $152B as of 4/29, and running a $117B Surplus throughout the month of April (the highest in 72 months)…Treasury issued an additional $60B of public debt on 4/30, bringing cash in hand to nearly $214B….the highest since February 2011.

As I discussed in the run up to the last debt limit battle…it’s not when you hit the debt limit that matters…it’s when you run out of cash. Obviously…the more cash in the bank come 5/19, the longer we will make it before hitting that point.

Now the timing of the January debt fight was precocious for all involved given its proximity to the tax refund season…tax refunds literally would not have gone out in February…along with a lot of other things…. revolution would have quickly ensued. No…if you are going to have a prolonged debt fight…summer is by far the best time to do it. While July and August are likely to post substantial deficits, June and September might very well post surpluses, so a $200B+ cash stash aided by “extraordinary measures” could very well get you into October before the coffers start to run dry.

Gentlemen…the game is afoot!! Stock up on popcorn.

No Budget No Pay Act 1/22/2013

Looks like the house has officially approved the debt limit increase, but instead of putting an actual number on it, they gave treasury whatever it takes to get them through May 18. By my math, that’s somewhere between $400 and $500B. However….I think it would be hilarious if treasury just issued like $6T of debt on May 17….pulling in enough cash to get Obama through his second term without needing to think about this again. There are probably some limitations to prevent that, but who knows. I suspect this is all just a slow retreat by the Republicans, who realized a bit too late that they were walking into a minefield with the debt limit and that Obama was ready to call their bluff. They are hoping that between now and May, something else will have caught the publics eye so they can surrender privately. Of course, they did get a couple headlines with their No Budget/No Pay idea, which Democrats rightly called a “gimmick” and a “joke”. But this is politics….and that’s what we vote for, so no surprises really. In the long run, nothing has changed…the US will default on both on and off balance sheet obligations at some point in the future. When it does…it’s not going to be pretty.

Debt Limit Update 1/17/2013

According to The Hill

House Republican leaders on Friday announced a plan to condition a three-month increase in the debt limit on the Senate committing to pass a budget by the April 15 statutory deadline.

The bottom line seems to be this..the Republicans will increase the debt limit by enough to get through three months. No word on how much that is…I’m guessing somewhere between $300B and $500B depending on how good they are at math. Here is the kicker…. if congress…that is both the house and senate don’t pass a budget in that period…they will all cease to be paid, presumably until a budget is passed. No word yet on if the lobbyists will also cease paying them :)…this seems to be only taxpayer funds they will forfeit.
If nothing else this is at least interesting. I guess the Republicans don’t have the spine to shut down the government in the middle of tax season…Probably a wise move. So they avoid that battle, and will undoubtedly attempt to squeeze a few hundred billion out of the budget…of course over 10 years so we won’t even notice if it’s bogus because honestly, what % of us can even divide by 10? 40%? 60% maybe?
Of course, this is just a proposal…let’s see if they can even get it passed before we stop worrying about whether or not Uncle Sam goes bankrupt before, or after we cash our tax refund checks.