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US Debt Limit

Debt Limit Raised…Now What?

By | Commentary

As most expected, it appears the debt limit was raised and the government has reopened…at least for now. I’m not sure how they got to these dates, but apparently the government will reopen and be funded through for 3 more months expiring 1/15/2014. The debt limit will be raised, being frozen at wherever it ends up on 2/07/2014. I’ll have a better guess at that after they true up the missing “extraordinary measures” ,  but I’m thinking it will pencil out to somewhere between a $400B-$500B increase ending up between $17.1T and $17.2T.

At that point, they will once again be able to employ EM…effectively adding $200-$300B to the debt limit. Now, I’m not sure why they chose 2/7, but if you are trying to maximize the time you get out of EM….this is about the worst date you could ever choose. The reason is that tax refunds pick up in early February and stay strong through March/April before petering out in May. So while last time we were able to hit the debt limit in mid May and squeeze an additional 5 months out of EM….this time, it might be a challenge to make it into early March. Of course, this assumes they don’t take the approach I would if I were Obama…which would be to issue about $3T of debt on 2/6, banking the cash, and making it all the way to 2016 without ever having to talk about this subject again. (not saying that’s what’s right for the country).

So…here we are, the day after a supposedly epic battle. Gotta say, not much has changed. Ok…maybe nothing has changed. I’m still not entirely sure what it was all about. At first it was about delaying Obamacare…which was never going to happen, and then, it was supposedly about balancing the budget…but the thing is, neither party really wants a balanced budget. Balancing the budget means cutting $800B of spending, which means cutting social security right here right now….which is politically impossible for either party. So either this was all about something they were never going to get, or it was about something nobody really wants….

Honestly, the end of this story has been pretty clear for a few years now. The US will default on it’s $17T (and growing) debt sooner or later, it’s just a matter of time. Furthermore, the US will default on the $100T+ of political promises…including SS, Medicare, Medicaid, Obamacare, Food Stamps ect… The math on this is extremely simple folks…it’s just a matter of time before the game is over. It is more apparent than ever that the political will to do the right thing simply does not exist within our democracy.


Default on Debt vs. Default of “Obligations”

By | Commentary

If you listen to the news or read any article, there is a lot of hype around this 10/17 “default” date. “The US has never defaulted….this would be catastrophic”…they all claim.

So first we need to discuss what we mean by default. As discussed in The Debt Limit Will Be Raised, looking at the first full month…November, the government will still have about $200B of revenues coming in, but about $330B of scheduled cash outflows. So we really aren’t talking about the federal government grinding to a stop…just being forced to live within it’s means. Most (but not all) of the commentators are being careful with their words…saying we would default on out “obligations”…which I suppose means all currently planned government spending (is it a default if I decide to eat in instead of taking the family out to dinner tomorrow night?).

We should be very clear however, that the federal government will have more than enough cash inflows to cover all interest payments and continue to roll current debt as it expires. Over the past 12 months, the government had $3.058T of cash revenues….and only $225B of cash interest payments…a coverage ratio of over 13X.

So…this is extremely clear… any technical default on bona fide on the books debt…will be a completely voluntary event. I have read some articles saying the treasury system simply is not set up to prioritize payments….basically first in, first out. To that I say…BS.

But on the other hand…default on “obligations”…is definitely imminent. In November, there will be a ~$130B cash shortfall if treasury isn’t allowed to issue debt….more than 1/3 of scheduled cash outflows. The only think that even comes close to that is cancelling Social Security, Medicare, and Medicaid….not exactly a solid 2014 election platform….which is why I still expect the debt limit to be raised, probably before it comes an issue, but if not, by early November.

I’ve been saying for nearly a year now that the US will ultimately default on both on and off balance sheet debt. We have reached a point where the promises made for debt and social programs are simply impossible to ever make good on. I still think it is unlikely that October 2013 is the date of that default. (not that it will be one date…probably a long drawn string of broken promises) So to wrap it up…default will happen and default needs to happen…..but what is going on now is just political gamesmanship, so sit back and enjoy the show. Odds are, they will raise the limit, and agree to shave a few billion off the 10 year deficit at some date to be determined….ensuring an even bigger and “badder” default at some point in the future.  Note to self…”don’t lend Uncle Sam any money”


US Daily Cash Deficit 9/24/2013

By | Daily Deficit

The US Daily Cash Surplus for 9/24/2013 was $0.5B bringing the September Surplus through 24 days to $53B. Revenues from “Taxes Not Withheld” dropped from $9B on 9/23 to $4B on 9/24….stronger than the 2012 amount by $1B, but still indicating these receipts are probably trailing off.

09-24-2013 USDD

Total cash revenues for the month are now running only 3% over last year but should get a material bump on 9/30, ending somewhere between +5%-10%. Not bad, but we may pay for it with a weak October. Tomorrow, we get the final large SS payment of about $12B which will more than likely force the first deficit over $2B that we’ve had in several weeks.

Cash in hand was $55B, which we will probably see grow by $10-20B by month end, lets just say to $70B absent any “extraordinary measures (EM)”. The first week of the month is typically pretty brutal….assuming the government isn’t shut down, we would probably run a $50B+ deficit in that first week of October alone. So Treasuries 10/17 date looks good on paper. However, the CBO also came out with an estimate stating between 10/22 and 10/31. About a month ago, I had guessed early to mid November…citing the difficulty of forecasting without fully understanding what EM magic tricks Treasury had left up their sleeve. Regardless of who is correct, it does seem clear that within the next 6 weeks, either the debt limit will be raised, or we will be in for one hell of a show….maybe even both 🙂

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.

August 2013 Monthly Statement Of Public Debt

By | Commentary

Every month, Treasury releases the Monthly Statement of Public Debt(MSPD) which gives us a detailed breakdown of the public debt outstanding…each issue still outstanding, rates, terms ect..

“Why is this interesting?” you may be asking yourself. Well…it’s interesting for me because we get to compare the actual issue rates over time. You see…bond yields are in constant motion…changing every single day in response to market forces, fed manipulation ect… Investors can make or lose fortunes on those moves, but just like your 30 year mortgage, once issued, the borrower, in this case the US government, has effectively locked in a rate for the duration….so any fluctuations after the fact have no affect on the future cash outflows for interest and ultimately principal repayment.

So…let’s start out by looking at the 30 year bonds….with about $1.5T outstanding.

09-13-2013 30 year Bond rates

The chart shows all of the outstanding 30 year issues dating back to 1985 at 11.25%. You can clearly see the downward trend bottoming out a year ago at 2.75% in the August and November 2012 issues. More recently…the May 2013 was issued at 2.88%…this was before the increase in rates we have been hearing about. Sure enough, the August 30’s were issued at 3.63%, a .75% increase. That’s not a good sign, but it’s not exactly time to panic (at least not about rates). Rates on the 30 are still historically low, and the $16B issued last month isn’t even large enough to move the needle on the weighted average rate on the 30’s, much less the entire $12T outstanding.

Moving down to the 10 year with about $2.2T outstanding:

09-13-2013 10 year Bond rates

The rate on the 10 year has fallen steadily from the May 2006 issue at 5.13% bottoming out in August and November 2012 at 1.63%. As with the 30 year, the issue rate increased 0.75% from 1.75% in May 2013 to 2.5% in August.

There were no new 60 month issues, but I’ll throw the chart out there just for fun.

09-13-2013 5 year Bond rates

The pattern in the 60 is quite similar, moving off earlier year lows up about 75 basis points in recent months.

09-13-2013 3 year Bond rates

Finally, a look at the 3 year with $1.2T outstanding, which has been bouncing around 0.25% for a few years now, recently rising to 0.63%.

We could continue marching down the line, but the rates on everything shorter than 36 months are essentially zero….the 12 month rising from 0.11% to 0.14% is going to have a negligible effect the cash interest paid..I’ll start worrying about those when they get closer to 1% or so.

So what does it all mean? I’ve been saying for a while that when the Fed loses control of rates it will be game over for the deficit. Perhaps we’ve seen a 0.5% across the board increase in the past few months (including bills, which haven’t moved much)…have they lost control? I don’t think so…not yet anyway. Don’t get me wrong, they will lose control, and this surely is not a good sign (for them…it may be good for savers), but we’re just not there yet. They still seem to have no problem selling debt at not much higher that historic lows, even if a good chunk of that is being bought indirectly by the Fed.

So while this is definitely bad news, odds are this will be a very slow motion train wreck. With $12T of debt already locked in, much of it at rates higher than current rates, it will take years of higher rates to materially change the cash interest paid.

09-13-2013 TTM cash interest paid

Above is a snapshot of the trailing twelve month cash interest paid. Even as the debt was skyrocketing, thanks to lower rates, the actual interest paid has increased only 61% from $133B to $214B over the same time period public debt outstanding nearly tripled from 4.4T to $12T.

09-13-2013 TTM estimated interest rate

This chart shows us my estimated interest rate by dividing the TTM cash payments by the average public debt outstanding over the prior twelve months. the moderate uptick in rates has not stopped the decline in the total effective rate as older debt is being retired and rolled into lower rates, even if those rates are a bit higher than they were 3 months ago. We are currently at about 1.8%, and it took over 4 years to coast down 1% from 2.8% in April 2009.

To wrap it up, I will just say that not a lot has changed….things are as bad as they’ve been, but exceptionally low interest rates are still enabling the government to carry a massive debt load. Rates are climbing off of historic lows, but it will take another % or two rise in rates and a few years before it really starts to show up in the cash deficit. With $12T outstanding, a 1% rise in effective rates would cost an additional $120B per year in interest expense…which would be added to the deficit and grow exponentially from there. We’re not there yet, but stay tuned. If rates continue to go up, the destructive power of compound debt will be unleashed on the annual deficit, providing the final nail in the coffin, finishing up what Social Security started. In short…yes, we are still doomed.