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Jul 20
0

## 7/18/2013 Daily US Cash Deficit

By copernicus | Daily Deficit

The US Daily Cash Deficit for 7/18/2013 was $5.7B bringing the July 2013 cash deficit to $83B with nine business days remaining. That’s already $3B over the estimate I made at the beginning of the month and looking at historical patterns, it would be a bit abnormal to see much improvement over the rest of the month, but you never know anymore.

Revenues are still sitting on +5.5%. The extra day should be good for about+$9B…a 4% bump….so I suppose we are more or less on track for the +10% we are looking for, but August is going to be a real challenge. On cost…I think we are likely to see some real improvement by month end…(adjusted for timing of course.) Defense vendors and education look to be the big cuts so far…even interest is down about $1B…thanks ZIRP!!

Jul 20
0

## Detroit Vs. America – Ich Ben Ein Detroiters

By copernicus | Commentary

I don’t think it shocked anyone that Detroit filed for bankruptcy yesterday, but it set off a mad scramble by the creditors….most interestingly perhaps(but not surprising)…by the city’s pension funds.

First…lets take a look at the numbers. I found a copy of the city’s last full fiscal report on their website….covering the period ending 06/30/2012. I’m guessing the 6/30/2013 may be delayed by just a bit.

Ballpark….per page 21, total revenues were $2.3B, vs. total expenses of $2.6B, for a total deficit of $300M. That’s a 13% annual deficit…which honestly doesn’t sound that huge. The US deficit…over the last 12 months ending 6/30/2013 was $800B….$3T of revenues and $3.8T of outlays….good for an annual deficit of 27%….more than double of Detroit’s.

Debt, according to the headlines at the time of the bankruptcy filing was $18B…about 8X 2012’s revenues. The US is in a little bit better shape….with $16.7T of debt on $3T of revenues, good for a 5.5X ratio. So, we still have a ways to go before we get to Detroit’s level, but it is definitely on the horizon.

Now…I don’t have the 2013 numbers, but this clearly illustrates how a relatively small annual deficit can topple a huge mountain of debt. The bottom line is…as long as people are willing to lend me money….I can keep a scheme like this going indefinitely. I can borrow to pay my bills, I can borrow to pay pensions, I can borrow to build a football stadium, and I can borrow even more to pay the interest on all the debt I already have. But…once the lenders start to think maybe you can’t pay it all back….it is almost instant death. All of a sudden…you can’t make payroll, you can’t provide police protection, and when your debt comes due….either the rates to refi are suddenly astronomical, or you just can’t refinance at all. So while maybe you could afford to pay $30M or so of interest a year on that $1B bond coming due….you certainly can’t afford to refinance at 10%, and the odds of you coming up with $1B to…god forbid…actually pay down debt are zero.

So who gets paid? There is $18B of debt, yet the city is running a deficit of $300M per year (again…year old data). And by all accounts…they are not even able to provide basic services to the city…like even fixing broken street lamps. The bondholders…well, they were foolish enough to keep lending, even though it has been obvious for a while what was going to happen. I think they should get nothing.

Now the pensioners….this is a bit more complicated. There is no money to pay…it’s a tragic situation no doubt. Some will argue that the unions negotiated outrageous pensions with their cronies in government…that’s probably true to some degree. I don’t know the answer, but if nothing else, this illustrates the enourmous unrecognized risk of defined benefit plans, whether it is from the city of Detroit, a fortune 500 company, or…the granddaddy of them all…Social Security. In all of these scenarios…you pay in or defer income for decades…perhaps half a century…for the promise that someday….decades later a) the organization will still exist period and b) the organization will still have the ability and willingness to make good on that promise.

This in itself is something I find so hard to understand about defined benefit plans. How many people in this world would you personally trust to take care of hundreds of thousands, or millions of dollars of future benefits for you? Maybe your parents, siblings, or children….maybe… Uncle Sam? No!! Congress..with an approval rating of what…15%? No!! The mayor of Detroit? No!! Any CEO of any company? Hell No!! Wake up America. The entire premise of all defined benefit programs is blatant fraud. Rather than pay you now…in cash….companies and governments offer to pay you later…in another quarter, when it will be another CEO’s problem…another Congress’s problem…another Mayor’s problem…another President’s problem. Shall I say it again…wake the hell up!! You will not be paid. You were conned…you were scammed….you bought the lies hook line and sinker, and ultimately…you must own the consequences of your poor decisions. Yes you are a victim here…yes it sucks….unfortunately…nothing can be done about it. The money is gone….spent decades ago by politicians you elected.

Ok…stepping off that soap box….We are all Detroiters (is that even the right word??) now. What happened to Detroit is what will ultimately happen to the United States Of America, and it may be sooner than any of us realize. Already….under the guise of helping a struggling economy, the Federal Reserve has resorted to manipulating interest rates to near zero and has resorted to essentially printing money and lending to itself using QE…to the tune of nearly $2T. These are already desperate measures….how long can Bernanke and Lew keep this charade going? My guess is less than 10 years….perhaps much less. As with Detroit…once we lose the ability to issue new debt and roll what you currently have…It will be nearly instant death. It would seem we have nearly run out of people to loan us money, so we have resorted to printing money and loaning it to ourselves with the Fed as a middleman. Were this game to end, and interest rates return to a normal rate…say 5% or so….I think we’d be done within a year or two.

But…as many have noted….it is nearly impossible for a sovereign nation with it’s own currency and a printing press to technically default. They are probably correct as this seems like the path of least resistance. So…in 2043 when you take that 30 year bond in for redemption….you may well get your $1000….but you’ll be lucky if it buys you a bag of potato chips. Same for today’s 38 year olds….hoping to retire in 30 years. You very well may get a social security payment deposited into your account each month, but it won’t even be enough to buy a bag of dog food…for your pet of course.

Jul 19
0

## 7/17/2013 Daily US Cash Deficit

By copernicus | Daily Deficit

The US Daily Cash deficit for 7/17/2013 was $10.3B as round 3 of Social Security payments went out totaling $12B for the day, $48.8B for the month, with one large payment left next Wednesday. Comparing this year to last looks like about an 8% YOY gain…pretty much on par.

Revenues still hovering between 5-6% YOY gain, so certainly within striking distance of the 10% we’ve come to expect. On the deficit…we are $21B worse off than last year…primarily due to timing. However…I had been expecting us to more or less match last year’s $82B deficit nonetheless…on higher revenues and lower costs. But…with 10 days left…historically we should expect to see a ~20B deficit over the rest of the month…putting us closer to $100B. I’m not changing my estimate yet, but it is looking less likely by the day.

Jul 18
0

## Debt Limit Recap Summer 2013

By copernicus | Commentary

It’s been 62 days since we officially hit the debt limit of $16.7B on 5/17/2013, and according to the latest I’ve been reading, Treasury does not expect this to become a problem until the September-November time frame. This is a bit confusing, so give me a second to explain what is going on here.

First…you need to know that hitting the debt limit is not the real problem….running out of cash is. If we hit the debt ceiling, but had $1T of cash in the bank, we could make it an entire year without having any problems. Obviously, we did not hit the debt limit with $1T of cash…we hit it with about $34B, but the point remains valid….we haven’t had any problems yet because we haven’t run out of cash.

Now, assuming an annual deficit of $800B, you might expect a monthly deficit of $67B…at which pace we would have run out of cash sometime in early June. Except…it’s not that simple. You see, the month to month deficit/surplus is actually all over the place, with February usually having the highest deficit at $200b+ and April typically running a strong surplus of $100B+. The rest of the months fall somewhere in between, with quarter end months generally being better on strong quarterly tax remittances.

So the time it takes for the debt limit to be a problem depends on how much cash you have in hand at that point, and the expected deficit/surplus over the coming months. The last debt limit fight…you may recall came about in January…which is the absolute worst time to have a debt limit fight because a huge amount of tax refunds are scheduled to go out starting in February. If they don’t go out…you could have a revolution on your hands, so not surprisingly, a deal was brokered, pushing the fight out to the middle of May, which as it turns out, is just about the best time to have a debt limit fight…if you must.

The main reason is that you have the strong early month outflows behind you, and with June in front of you likely to run a surplus, you have at least a few months to work it out. This June ran a $116B cash surplus….building that $34B cash stash to $135B by June 30…thanks in part to a ~$60B payday loan to Fannie Mae. Now, July and August are not deficit friendly months…I expect about $200B over this two month period. That’s more than $135B, but…thanks to the shenanigans known as “extraordinary measures”…which essentially hides real debt off the balance sheet…it seems likely that treasury can pull the difference out of its hat… September is likely another Surplus month, but small….so making it to September gets them through to early October. I don’t see how they make it much further, but you never know.

Now honestly, the date doesn’t matter….it took us 30 years to get to this point…whether we run out of cash in August or November really doesn’t matter one bit in the big picture. I fully expect the debt limit will be raised and here is why. Even with admittedly material improvement in the deficit…from $1.6T in 2009, to $600-$700B likely for calendar 2013…$700B is still a huge number. And if they don’t raise the limit…they can’t spend it. I’m not saying it’s the right thing to do, but yanking that $700B per year out of the economy is going have immediate consequences that nobody in either party is ready to deal with.

Basically, it would mean cutting everything by about 20%. Social Security, military pay, medicare, Medicaid, food stamps ect…. If you don’t cut some…like SS and military pay….you have to cut even more from the remaining programs. $700B/60k per person gives me over 10M jobs lost directly, and who knows what the secondary and tertiary effects would be. Now…one way or another, that’s going to happen anyway (and we will be better in the long run for it), but don’t expect the debt limit to be the trigger. Both Republicans and Democrats will work together to keep the imaginary party floating as long as possible before gravity takes over and we all tumble down the cliff together.

Because of this, I am quite confident that after a lot of noise and pretend victory claimed by both sides, the debt limit will be raised. Don’t worry…Be Happy!!

Jul 17
0

## Immigration Reform To Reduce Deficit By $1Trillion?? Uhmmm….Bull#@!%

By copernicus | Commentary

I finally got a chance yesterday to watch Sunday’s “Meet The Press”…the one political show I try to watch each week. Obviously, there were bigger news stories, but in the interview with Harry Reid, he mentioned several times that the Senate Immigration Bill would reduce the deficit by $1T dollars….”go read the CBO report” he said. So I did.

Conclusion….it’s all complete BS. For starters…the “savings” predicted over 2014-2023 is $197B…$1.6B per month. Basically, a rounding error. So…where is the rest of the savings…you ask? Well, they predict an additional savings of $700B over the 2024-2033 time period. I thought it was ridiculous when our politicians started trotting out 10 year savings instead of annual numbers…now they are trotting out 20 year predicted savings? Why not 50 year…or 100 year estimates just to make the numbers look bigger in print?

Look…the truth is, nobody, not the CBO, not myself…not anybody can make an accurate prediction for 10+ years. Not for something as cut and dry as social security outlays, and certainly not for the amount of deficit savings for a proposed immigration bill. What they did here…almost certainly at Reid’s request…was to assume that the immigration bill increases the population over the base case, thus increasing GDP, and I suppose tax revenues. They go on to change their estimates about future wages, productivity, capital investment ect….I could go on, but the bottom line is, it’s all bogus. Harry Reid walked over to the CBO….handed them a list of ridiculous assumptions to process, and they popped out exactly what he wanted…a ~$1T deficit reduction over the next 20 years. Of course we know it will be completely wrong, and Harry will be long retired before he has to deal with the consequences.

I honestly could care less what happens with immigration reform, but I do think that this provides a very good illustration of why we are completely and utterly screwed in the long run. There is no honesty left in our government. Whether it is proposed legislation or policies, each side shows up with their own “experts”….each of whom are free to lie their asses off. The public then is left to decide not what is the correct or optimum path….but which side was the best liar. So…here we are…20 years later. At 18…we graduated valedictorian of our class…ready to head out to change the world and make our fortune. This morning, after years countless bad decisions….we woke up in a ditch…sick, penniless, homeless…looking for our next fix….lamenting about what could have been. Until we get a shred of honesty from our “leaders” from both major parties….there is no hope….we will continue down our dark path…making bad decision after bad decision. Such a waste…we are so much better than this….yet here we are. It’s just sad really. I grew up in the greatest nation the world had ever seen. My kids won’t.

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