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. 🙂

The Spending Problem

In April 2007, something amazing almost happened…driven by strong April tax collections, we came within a mere 64B of posting a Trailing Twelve Month (TTM) surplus, a feat not achieved since 1/2002. From there, the deficit proceeded to explode…topping out at $1.8T in 9/2009 before gradually improving to the “healthy” $1.2T we saw with the close of 11/2012. So let’s compare 2007 to the latest full year we have, 2011, and try to figure out what happened. 2007 ended up with a $190B deficit…2011 ended at $1,204B….a $1T change in a mere 4 years. If you listened to the news lately…you would probably guess that plummeting revenues and soaring costs together created the mess we find ourselves in. You would be partly wrong.

The truth is, Revenue was pretty constant over that 4 year period, dropping $87B from 2007 to 2011. Spending…on the other hand spiked $925B. So of the $1T increase in deficit from 2007 to 2011….about 10% of that was from lower revenues….and 90% was from higher spending.  So…that’s kind of understandable in 2008-2009…when Tarp money was flowing out…but 2011? What are we spending another $1T per year on that we weren’t in 2007? I sure don’t feel like I’m getting another $1T worth of government services…do you?

The above table has a handful of the spending categories reported in the DTS…we just line up 2007 with 2011. With the exception of a few small categories, spending is up…huge. Over a period when revenue was essential flat, and population growth up perhaps 5%….spending is up accross the board 36%. Most is already locked into a steady upward trend like Social Security and Medicare. What’s left is too small to make a difference. For anyone looking…the future is quite obvious. Spending will continue it’s upward trajectory and whatever revenue additions our government manages to squeeze out of taxpayers will be both inconsequential and fleeting. As a result…deficits will continue to soar and the debt outstanding will continue to climb until external parties refuse to buy any more debt and start liquidating what they do have. At that point, either the spending stops…and trillions of off balance sheet liabilities like social security and medicare are defaulted on, as well as on balance sheet liabilities like bonds outstanding and government/military employee pensions.
The other option is that they just start printing money…which lets be honest has already started. The treasury has accelerated a little game they like to play with the federal reserve. The federal reserve magically creates “e-money” and uses it to buy debt from Treasury. Then, when the interest payments are due…treasury hands them off to the Fed…who turns right back around and gives it back….and reports it as REVENUE!! Per my back of the envelope calculations…this accounts for about $1.7T of our current outstanding debt. In this scenario…the price of everything increases as the value of the currency declines. It’s a kind of an invisible tax…rather than directly taxing you, the government steals it while you aren’t looking. That CD that used to yield 5% and is now 0.25%. That $20 that used to fill your tank…now gets you half. That $1.5 pound of ground beef that used to feed your family…now $3.50. We kid ourselves playing games with accounting, debt, and these silly keynsian theories, but in the end, the “Econoverse” always wins.

US Debt Limit Update 12/4/2012

As of 11/30/2012, the US was $63B away from hitting the debt limit of $16.394T and had a cash balance of $49B for a total “cushion” of $112B. Though November’s deficit was $188B, December, being a quarter end should have around $100B of additional revenue over November. December 2011 had a $59B deficit, so we will start this month assuming the same….it will likely be a few weeks before we have any indication of whether December 2012 will be higher or lower than December 2011. If we assume December 2012 and January 2013 will play out exactly like their prior year period did….we get to exactly Jan 31 2013 before hitting the end of our $112B “cushion”.
Note that this assumes no “extraordinary measure” funny business, and no fiscal cliff.  At this point, predicting any of that accurately seems impossible, so I’ll stick with the prior estimate of 2/14 at this time. I am quite surprised that I have not heard it mentioned yet, but if the debt ceiling is not increased, tax refunds could very well be in jeopardy…I guess someone is saving this as a trump card, I just don’t know who. Just looking at the numbers….getting through the month of February, much less March, both heavy with tax refunds looks to be impossible without a deal. It will also be interesting to see how fast Treasury moves to increase cash by issuing debt….they have the power to force this issue…or at least get it back in the headlines at will by issuing the entire 63B of debt now.. hitting the debt limit immediately, yet increasing cash to $112B.

Are Intragovernmental Holdings(Internal Debt) Real Debt???

 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.