Calculating The Deficit: 4 Methods

For one untrained in the art of Deception Accounting, it would be easy to conclde that the deficit is a pretty straightforward concept…Revenue – Outlays = Surplus/(Deficit)…right? I thought so too for a while….taking the government’s reported Deficit # from the Monthly Treasury Statement (MTS) at face value. I even took the time to tie it out as I was gathering the data before I ever went live with this blog….comparing FY 2011 and FY2012 and finding only a $7B and $3B difference…good enough for government work right??

As it turns out…no. Over the last year, I have determined that those two data points are actually an anomaly, and that the reported deficit is quite different from a handful of other deficit calculation methodologies…including the methodology I use here when calculating the daily “cash” deficit. For example…per the MTS…the deficit over the last 12 months…May-2013-April-2014 was $500.097B. Compare that to the USDD methodology…at $569,646…nearly $70B higher.

2014-06-04 D1 VS D2

Basically….what this chart is saying is that the government is telling you the deficit over the past 12 months is $500B….and I’m telling you that it’s at least $570B. Is this a problem, and which number should we believe? To delve into that, let’s take a step back and first define four different ways one might go about calculating the deficit.


D1 takes the numbers straight from the MTS…this is the official deficit number. How it is calculated is anyone’s guess…my guess is that it’s loosely based on cash, but also includes accruals, and has cherry picked segments of government completely carved out. One large example of this would be the US post office, which operates under the farce that it is somehow a separate organization…and therefore USPS losses( and profits) are excluded from the deficit.

D2-Cash Flows:

This is the primary methodology I use to calculate the deficit based on the Daily Treasury Statement Cash Inflows and Outflows. It’s fairly straight foreward….in a given day, if cash deposits are $10B, and cash withdrawals are $15B…you have a $5B deficit. If your beginning cash balance was $50B….you would end the day with $45B.

Of course, it is never that simple, with the main complication that debt is continuously being issued and repaid…every single day, ranging from hundreds of millions to hundreds of billions on any given day. Fortunately….these are broken out on the DTS, and so we simply subtract them out conceding that issuance and repayment of debt do not contribute to the deficit directly. For example…going back to our simple example…say we also issued $100B of new debt and repaid $50B. Rather than ending the day with $45B cash…we would end up with $95B…but our deficit would be the same…$5B.

Finally, I pull out tax refunds…subtracting them both from revenues and outlays. The net effect of this on the deficit is zero, but I feel this is a more accurate accounting treatment…not making this adjustment would overstate revenue and outlays by about $350B per year.

Now…there is one flaw in this approach that I am aware of, and it relates primarily to debt issued at a discount. For example, just say we issue a $100 6 month T-Bill for $99…and pay it in full 6 months later for $100. In reality, what has happened is that we have is a $99 loan and $1 of interest. Unfortunately, this is not how the transaction is accounted for on the DTS…where the $100 out is all lumped into debt repayment…and therefore the $1 of interest is permanently excluded from the deficit in the D2-calc. In the big scheme of things, it’s not huge…$30-$50B understatement of the deficit annually, but it is a problem.

D3-Delta Cash Delta External Debt: (Key word…external debt only…D3 does not include the $5T of Intragovenmental Debt).

This is a very simple approach that in theory probably yields the most accurate deficit number available…in theory at least. Basically…I can ignore everything else and just observe the change in debt and cash between two periods to calculate the deficit/surplus over that period. Say I begin the period with $100B of cash and $10T of debt. If I end the period with the same cash and debt, my deficit….regardless of all the noise in the middle…was zero. We know this because mathematically….a deficit/surplus can only manifest itself in one of these places. So if we end the period with $10.2T of debt, and $150B of cash…we could calculate that we had a $150B deficit over the period.

There is one caveat however….this methodology breaks down during periods when the Treasury department uses “extraordinary measures” (EM) because essentially they just start pretending that they don’t owe money on some things….thus understating debt and completely nuking this calculation. We saw this back in October when the debt outstanding jumped $328B the day after the debt limit was raised (removed actually). So basically, any period that starts or stops within EM…D3 will be useless for calculating the deficit. However…once EM is stopped…all of the debt is brought back on the balance sheet and everything ties back out. So looking back to last summer, we had EM in effect between May and October….so D3 between say June and September would be screwed up…but I could look at April-November and get the right number.

In any case…I started this blog back in November 2012…right on the cusp of EM that started in December, and I had data from the prior period of EM from the summer of 2011. So while I hadn’t yet defined D3…I was aware that it would not work for what I was trying to accomplish….which is why I developed D2 and chose it as my primary metric….though admittedly I was not aware of the weakness discussed above.

D4-Delta Cash Delta All Debt: This is pretty much the same as  D3, but it expands and includes the full balance of Federal Debt. As discussed here, I’m not convinced this is a valid method since I don’t believe the $5T of intragovenmental holdings are real debt…rather they represent a cumulative accounting of funds already stolen/misused. Furthermore…I fundamentally believe that SS…whose “trust fund” represents more than half of that $5T balance is nothing more than a cover for a broad based ~15% income tax….disguised as a pension plan that is really a gigantic welfare scheme…as discussed in detail here.

So…I present D4 primarily as a reference point only, though I don’t completely dismiss its relevance.

And now, with D1-D4 defined, let’s line them all up…I chose the twelve month period of April-2013-March-2014 because it avoids last summer’s EM issues for D3 and D4 as noted above.

2014-06-04 D1-D4

So we have the official MTS deficit number at $494B…$145B lower than what I would call the best number..D3 at $639. Just for fun…let’s pencil that one out by pulling up the final DTS from March 2013 and March 2014. We see that over this 12 month period cash increased from $79B to $142B… a $63B gain. However, Debt held by the public increased from $11.917T to $12.619T…a $702B increase. So net the “bad guy” of $702B debt gain against the $63B “good guy” cash build….and we get a D3 deficit of $639B. You probably want to know what makes up the $145B delta…..that’s a damn good question…and one that I can’t answer. It has to be far more than just the post office being excluded…that was supposedly only $5B for FY 2013. But just because I can’t think of a good explanation doesn’t mean one doesn’t exist….any ideas from my readers?

2014-06-04 D1-D4 10 year

Above we take a final look…this time over the 10 year period from 4/2004 to 3/2014. Over that period, we see an $837B delta between the official deficit number and D3 ($2.9T if you believe in D4).

The question I asked at the beginning was

“Is this a problem, and which number should we believe?”

As I detailed above…D3 is the number I put the most faith in….cash and debt outstanding are separately verifiable and just about the last thing any organization is going to misstate…or worse lie about. I’m not saying they wouldn’t….just that they would probably lie about a lot of other things first….before resorting to lying about debt and cash, which are generally the easiest items for an auditor to verify. The MTS on the other hand….I’m not so sure. Give an organization some clever accountants and the power to define their own accounting policies and a standards and at the end of the day you will probably have some pretty useless financial statements….and that goes for corporate America too…not just Uncle Sam.

As for whether or not this is a problem… first thought was yes…. depending on what makes up that $837B 10 year delta between D1 and D3. If it is a systematic and pervasive intentional understatement of the United States deficit to the tune of nearly $1T…then I’d say yeah…it’s a problem…though at $1T…perhaps it’s barely material when bumped up against the big picture. It’s not so much the $ that are of concern…it would be the credibility of the government at stake….

But on second thought….since they don’t have any of that (credibility)….maybe it’s all just a big nothing either way….curious perhaps, but not as interesting as Dancing With The Stars Season 19???

When Will Interest Payments Exceed $1T??

MISH asks:

“When Will Interest on US National Debt Exceed $1 Trillion?”. It’s worth the read…and I suspect we are on the same page with this one…yes…we’re screwed. But…. while the charts he presents interest could hit $1T by as soon as 2018 in a worst case scenario. I find this quite infeasible…in fact, my model…and I’m not exactly an optimist, has the TTM interest passing the $1T mark in May of 2036….a full 18 years later.

There are a handful of differences in our assumptions that result in the large divergence.

1) I only count interest on external debt…the model they use includes internal debt. I have discussed this in detail before, but basically….paying pretend interest on the debt we pretend to owe to ourselves is an exercise in nonsense I’d rather not participate in. Hence…We currently have about $12.4T of external debt, on which we have paid about $218B of cash interest payments over the last 12 months. The rates on that range from almost nothing on the short term bills to 11.25% for the 30 year bonds issued in Feb-1985. So rough math…that gets us an average rate of about 1.8%.It’s not perfect, but it’s close enough. So…if $218B is our baseline….you can see that we have a long way to go to get to $1T.

2) The outstanding debt is all locked in at rates over terms from 1 month to 30 years. Thus, if interest rates doubled tomorrow, it would still take a very long time for that to show up in interest payments. The only debt immediately affected would be new issues, followed by the rolling of expiring debt. However…rates are currently historically low. Say the 30 year doubled from %3.75 to 7.5%… next year, when that 30 year at 11.25% needs to be rolled… the effect would still be to lower the average rate… blunting the impact somewhat. Finally…. Interest rates are unlikely to double overnight, or anytime soon, if ever. If they do…it means the Fed has lost control, and we will likely have bigger problems than when interest payments will hit $1T

3) The Federal reserve currently owns over $2T of the outstanding $12.4T of debt…and is adding $400-$500B per year under it’s QE3 program….so a substantial % of all new debt issued. (they don’t purchase direct, so they likely have a diverse portfolio…not only new issues). So, say the Fed owns $1B of those 11.25% 1985 bonds. In February, Treasury sends the fed their semi annual interest payment of $5.625M. However…all of the Fed’s “profits” are turned around and remitted back to Treasury….so the next day (actually Wednesday)…the fed sends the $5.625M, less maybe some overhead cost right back to treasury. In 2004, total Federal reserve earnings remitted to treasury totaled $18B…or $1.5B per month. In 2013, they were 4X higher at $76B…more than $6B per month. Now, while some of this is MBS and other QE3 holdings, the net effect is that a substantial and growing amount of the interest we pay is turned right back around and sent back to Treasury coffers…lowering the effective interest rate even more. Now…anyone with a brain can see this for the circle jerk that it is….unfortunately, brains seem to be in short supply.

And that gets us to what the article hints at and what I have been saying for about as long as I’ve been blogging….that low interest rate policy has absolutely nothing to do with “stimulating the economy” and everything to do with minimizing the governments interest expense. The Fed simply can’t let interest rates go up because it would ultimately blow up the deficit…just not nearly as soon as 2018. Same is true with QE….they can’t stop because there is nobody else to buy the debt…at least not at 1.8%, when anyone with a ruler and a piece of paper can clearly deduce that one way or another….all of this debt will ultimately be defaulted on….if not outright, then it will at least be inflated away. Still…for now, this is an extremely slow motion trainwreck. Cost pressures from Social Security, Medicare/Medicaid/Obamacare, and interest, while increasing…do so at a glacial pace compared to the financial world use to going at the speed of light. For now, these increases are being offset by healthy revenue gains and help from the Federal Reserve….who are desperately trying to delay the inevitable explosion.

To wrap it all up and answer the question “when will interest hit $1T?”… my best guess is actually never. I seriously doubt we make it long enough to run up a $1T per year tab. Not sure if that’s good or bad.

Last Year’s Debt Ceiling Fight

I was watching “Meet The Press” yesterday and during David Gregory’s interview of Mitch McConnell, Gregory was hounding McConnell on whether or not he would use the debt limit as a bargaining tool over the next month. Fair enough, but one thing he kept repeating kept grating against my skull. He kept implying that the reason the US rating was downgraded after the last round was simply because the fight happened in the first place. This is ridiculous. The debt was downgraded because we as a nation have a negative cash flow of about $100B per month and no viable plan to even marginally address this problem. Gregory kept implying that if only Republicans had not made the debt limit an issue, our credit rating wouldn’t have been downgraded. Financial ignorance is nothing new, and since McConnel didn’t call him on it, it’s a pretty safe assumption they are in the same boat. Looking at the facts, it’s a wonder US debt isn’t rated as Junk.

Full Disclosure….a few years back I liquidated about $1k of savings bonds my kids had received from their grandparents for college and purchased silver dollars. I have no regrets.

2012 Cash Deficit Only $1.096 Trillion

Sorry for the delay on this one…It took a lot longer to get through the editing process at Seeking Alpha than I expected. Here’s the link.

2012 US Cash Deficit

It’s worth the trouble to get these published at SA first because it it pushes the article, and this site out to a far wider audience that it would get here alone. Also, I get paid per page view, which let’s be honest, isn’t much, but I won’t be sending it back.  So click on over and tell all your friends about it!!

Daily US Deficit For 12/31/2012

Swing and a Miss!! The US Daily Deficit for 12/31/2012 was $1.4B, substantially lower than my projection if $15-25B, leaving December’s surplus solidly intact at $20.6B vs December 2011’s $59.3B deficit. I’ll have more analysis later, but Revenue was up $45B and Outlays were down $35B resulting in an $80B improvement. No too shabby, if it it sticks. I’m hoping to get a 2012 total year piece posted in the next few days, and after that maybe a more in depth review of December and a look at January. So many things to do, so little time.

12-31-2012 USDD-TEST