Analysis of the Deficit, Fiscal Cliff, and US Debt
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. 🙂