Tag

debt limit

The Debt Limit Will Be Raised

By | Commentary

The news of the day is that Treasury Secretary Lew has announced 10/17 as his latest greatest estimate of when we will “for real” become unable to cover outlays with incoming cash. Remember….hitting the debt limit isn’t the problem(that happened back in May and was a completely voluntary event)…running out of cash to pay bills is the problem.

Looking at a partial month is problematic, so for simplicity, let’s just assume we run out of cash at the end of October. What would November look like?

Over the full month, per my current forecast, November should see about $202B of cash revenues, offset by about $331B of outlays, good for a $129B deficit. But the good news is….we can still pay for $202B of those expenditures. But how to decide what to pay…and what not to pay?(Normally…they would issue $129B of debt in exchange for cash…that will cease to be possible) That is the problem. $35B or so of interest is due…probably want to pay that. Rolling expiring debt isn’t a problem…..If I pay off $1B of expiring notes….then replace it with a new $1B issue…debt outstanding remains constant. Not paying Social Security, Medicaid or Medicare would save $133B, which is enough, but that probably wouldn’t end well. Active duty military pay??? Nope. below is my forecasted outlays….what would you cut?

09-20-2013 November 2013 Expenditures

And this is the dilemma our poor…poor politicians find themselves in…both Republicans and Democrats. The government spends about $3.8T per year, but only manages to bring in $3.0T of revenues. The plug is debt…..$800B. So now here we are….right at the debt limit. If it isn’t raised, all else equal…..we have to cut $800B of spending. But unfortunately…all else is not equal. If you cut $800B of spending….by definition that cuts GDP by $800B directly, and who knows how much indirectly. This in turn, cuts revenues, which cuts spending….it’s either a terrible or wonderful circle, depending on who you are. Just for reference $800B is equal to about 16M 50k per year jobs….perhaps 8M (or less)government jobs I suppose 🙂

That’s what it would take to balance the budget. Is that what you really want? Look folks…it’s simply not politically possible….therefore it will not be done. Oh sure….they may reach the limit for a few days or even a week….maybe “slow paying” some bills (trust me…the checks in the mail) but not for long and I doubt it even gets that far. The debt limit will be raised…not because it’s the right thing to do…but because it is the easiest thing to do.

Don’t get me wrong…I’m not endorsing this….it’s not what I think should happen, rather, it’s what I think will happen. Honestly, it’s almost certainly too late….this cycle will continue until it collapses on itself and all of this debt (on and off balance sheet) is simply defaulted on, probably by inflating it away.

Not that anyone has asked, but my solution would be over say a 10 year period (wish we could have started 10 years ago)  simply cut all non-essential and unconstitutional expenditures (including social security, Medicaid and medicare) 10% per year until they are zero….reducing taxes along the way. I would also default immediately on all $16.7T of debt outstanding….if you were dumb enough to lend money to Uncle Sam…..aka our congress with a single digit approval rating…. well…you deserve to lose your $16.7T.

Finally, when it was all said and done I would cut taxes to put them in line with the new expenditure requirements…probably somewhere between $500B and $1T per year. Yes…there are a lot of details to work out, and it would never actually happen, but the short term pain would be made up by long term prosperity…which is why it will never happen….it’s been a long time since anybody told the American people no, and I see no indication anybody is going to start now. The majority has found it’s way into the nation’s pocket book demanding pensions, schools, food stamps and infinite government paid medical care far beyond the nation’s willingness, or even ability to pay. No…there is no political solution here…the game will continue until it all crashes and burns. That day will come soon enough, but I doubt it is 10/17/2013.

Stay tuned….we look to be in for an interesting month.

US Daily Cash Deficit 9/20/2013

By | Daily Deficit

The US Daily Cash Surplus for 9/20/2013 was $4.9B pushing the September 2013 surplus through 20 days to $39B.

09-20-2013 USDD

Friday was actually a pretty good day, with Revenues gaining about $4B YOY and finally catching up with last year, ending at $+1B…good for a 0.5% YOY improvement. “Taxes not Withheld led the charge with nearly a $2B improvement, actually increasing from the prior day, where we typically expect these to start tapering off pretty heavily as all of those checks that were “in the mail” are received and cashed.

With six days left before the end of the FY, there is a bit more uncertainty left than I expected. First there are the Freddie/Fannie Dividends…which look to be about $10B higher than last year. Second is the extra day…a Monday (typically strongest weekly revenues), and finally, it is impossible to predict how “tax deposits not withheld” are going to finish the month. Were it not for these things, I’d probably guess we would see very little deficit action  over the rest of the month, ending right about a $40B surplus. However….given these outstanding items…. a $70B surplus (my initial forecast) still seems like a possibility if the stars align. If not… a bit lower.

July 2013 Monthly Statement Of Public Debt

By | Commentary

I stumbled across this series a few months ago and have started digging into the July issue released yesterday to see if there is anything interesting. Well…interesting is probably not the right word…but I think you know what I mean.

The MSPD gives us some insight into the makeup of the public debt…giving us a summary  all of the outstanding debt…from the $40B of 1 month bills issued 7/25 at 0.02% to the $10.5B of 30 year bonds issued back in 1985 at 11.25%…a rate that is 562.5X higher than the current one month. That’s interesting right?

First…some thoughts. The treasury bills (0-12 months) are not particularly interesting at this point in time. The average rate on the $1.6T outstanding is less than 0.1%, and as discussed in a prior post….the interest paid annually on this is something like $1.5B. The rate paid could double, triple, or even grow 10X, and it would still more or less be a rounding error. So…I look at it, but until the rate gets up past 0.5% or so…it’s just not material. Why would anyone lend Uncle Sam $1.6T at effectively zero? I have no idea!!

Bonds… the 30 year securities…we don’t get a lot of movement here. They are only issued every 3 months, and none are due until 2015. The average rate on the $1.4T outstanding is around 6%, though the latest issue back on 5/15/2013 was at 2.88%. It will be interesting to see what the new August issues go for…looks like it may be over 3.5%. That’s a pretty big hike, but still well under the average of the bonds outstanding, including everything issued after 2011. Of the bonds expiring in the next 3 years, the average is about 10%…so rolling those into new bonds today would result in a reduction of annual interest expenses.(but who knows what they will be in 3 years)

Notes (2-10 years)… This is where all of the action is….we have notes expiring and being issued each and every month, and the balance…at $7.7T makes up 64% of the public debt outstanding. In July, we had $94B of notes expire. Since of course the US never actually pays off debt…they just roll it…it is interesting to see what is rolling off, and what it is being replaced with.

So… In July, we have a 2 year issued at 0.38% roll off…and we had two new 2 year issues…averaging 0.31%. √

A 3 year at 1% rolled off…and a new 3 year was issued at 0.63%. √

And… a 60 month at 3.38% rolled off…replaced by a 60 month at 1.38%…a big improvement. √

And this has been the story over the last 3 years or so. Debt outstanding is increasing at around $1T per year, but the interest rates are being driven down by Fed manipulation. So..in July 2011, the cash interest paid over the prior 12 months was $204B on 9.8T of public debt outstanding. 2 years later…the cash interest paid on 11.9T of public debt was only$218B. This could continue on for a few more years…even as rates have bounced off some extraordinary lows…they are still extremely low historically speaking.


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

By | Commentary, 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 🙂

Debt Limit Recap Summer 2013

By | 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!!