Fiscal Cliff Thoughts 12/31/2012

With about 6 hours to go, I am reading a report saying a deal is close on avoiding the fiscal cliff, with just a few sticking points to be ironed out. I don’t know the details yet, but I doubt that it matters too much. I don’t think anyone ever expected rates to increase on most of us, regardless of whether the deal was done a few weeks back or even six months from now. Here’s what you need to know…while Republicans and Democrats have been engaged in an epic battle over whether to raise taxes on the “wealthy” by $25B per year or $50B per year….your taxes were raised $125B for 2013 due to the expiration of the payroll tax cut.

Now honestly, this probably needed to be done…especially if you are in the camp that believes the social security trust fund isn’t make believe. But the truth is, FICA is an income tax no different than any other, and while they distracted the country over the last month arguing over whether “wealthy” was defined as $250k per year or $1M per year….both parties quietly raised everybody elses taxes 2%. I’m waiting for the outrage that won’t come because let’s be honest…as a nation, math really isn’t our thing.

 

We Won’t Miss TARP, But Uncle Sam Will

TARP, the unloved program that either saved the economy or bailed out the bankers depending on who you talk too will probably be wound down over the next year. According to the latest report, the remaining balance outstanding is a little less than $50B. You may want to hold off the Champaign though, because when TARP is gone, so are the cash inflows it generates. Over FY 2010-2012, TARP contributed almost $300B in cash inflows to the federal coffers, reducing the cash deficit and the need for borrowing over that time period. To understand how, let’s first imagine TARP as a two year program. In year one, $700B of cash goes out, resulting in a $700B reported deficit. However, while there were certainly losses, TARP wasn’t a complete loss, as a majority of the money was eventually paid back. Back to our example, let’s say in Year 2, $600B was paid back and $100B was written off. Thus in year two, we record a $600B surplus. Clearly this is different than how a public company would account for the transactions…welcome to government accounting. Now obviously TARP was not a two year program, but the implications are similar. Reported deficits primarily incurred in 2009 are now being offset in future years as balances are repaid or sold.

Now at this point you may be thinking, what’s the big deal? So $50-$100B of “revenue” is about to dry up, that’s only around 2% of federal revenues. I bring it up because I just read an article comparing Obama’s tax plan to Boehner’s. According to the Tax Policy center, Obama’s plan would raise taxes on the “rich” by $40-$45B next year, while Boehner’s plan would generate about $20B. So neither comes close to even plugging the hole TARP, an admittedly small revenue source will leave when it is gone next year. The spending side offers little relief either. Next year alone, we can probably expect Medicare and Social Security spending to increase around $100B together, which is around the magnitude of spending cuts being discussed. Using the Daily Treasury Statements as a source, we can see that the trailing twelve month cash deficit as of 11/30/2012 was $1.176T, that’s over one year, not ten. The bottom line is, there is nothing serious about any of the proposals on the table. It is becoming increasingly clear that we as a nation will not voluntarily address this problem. That said, before you bid on that next round of 30 year notes, you might want to ask yourself what the world is going to look like in 30 years when you try to cash it in.

Seeking Alpha Links

Below are links to a few articles I wrote and published by the good folks over at SeekingAlpha.com. I should have posted links earlier, but hey, I’m kinda new at this!! A few are reposts wrung through the editing process, but this one is new…I think you will enjoy it:

Increase Debt Limit Or Tax Refunds Will Not Go Out

also:

 http://seekingalpha.com/article/1059021-the-spending-problem and http://seekingalpha.com/article/1066631-are-intragovernmental-holdings-real-debt

 

The Big Picture

     This is a repost from November…I’m bringing it back to the top for the new visitors we are seeing from Seeking Alpha
The chart below shows us what I believe is the most comprehensive metric for tracking our debt and deficit woes…the Trailing Twelve Month Deficit (TTMD). The TTMD is important because costs and revenues can swing wildly from month to month, but do exhibit annual patterns, so comparing a month to the same month a year ago is a much better indicator of whether the deficit is growing or shrinking than comparing it to the prior month. February is a great example. Most folks get all the tax forms they need to complete their taxes by the end of January, submit them, and get their tax refunds in February. This makes February the worst month of the year, with a $249B deficit in 2012. April, on the other hand, just 2 months later is generally the best month of the year, as those who owe taxes wait until the 4/15 deadline to pay. In 2012, April posted a surplus of $58B. If you were trying to project a trend over the Feb-April period…you simply would not have much success.  The TTM solves this and in  my opinion gives us a superior metric.

     Looking at our chart, we can see that we end 1999 with a $190B TTM Surplus, which grows and peaks at $307B in Jan. 2001. At that point we see the trend reverse, going negative in 2/2002 and leveling off around a $300B annual deficit. By 2006, we start to see some improvement, getting within $64B of a surplus in 4/2007. Then, things start deteriorating again, ultimately falling off a cliff in 2008 and bottoming out in 9/2009 at a staggering $1.8T rate. From there, as TARP and other bailout related spending slowed down, we have seen gradual year over year improvement and are currently sitting on a $1.1T TTM rate. The rate of improvement seems to have slowed down, though it will take a few more months to see if this is truly a trend.
     And that is where we are right now….running approximately a $1.1T annual deficit. Going forward, assuming the status quo, we can probably expect costs to continue creeping up, driven by entitlements and interest payments. We can also probably expect revenue to continue to increase at a roughly similar rate, leaving us with a structural deficit of somewhere around $0.9-1.1T. On the table with the fiscal cliff is roughly $100B in spending cuts and $400B in tax increases…though I don’t think anyone expects much of this to actually stand…but even if it did, it wouldn’t come close to closing the gap. In short, the situation looks pretty hopeless, which is why I am nearly certain, one way or another, the US will default on much, if not all of it’s debt and other obligations/promises some time in the future. When?? It is impossible to predict. Probably not in the next 6 months….though with the debt ceiling just a month or so off, it is possible…. On the other hand, at this rate, in 18 years (2030), we are at $36T…a fairly preposterous number. So anywhere between now and then is my guess. 🙂