This is not a surprise given the surging outlays and collapsing revenue due to the Covid 19 pandemic…$714B is the deficit for April 2020. That’s huge…back in 2008/2009 the largest deficit posted was $306B driven by large TARP expenditures. To further put it in perspective it is larger than the entire annual deficit for every year between 2013 and 2016. Add to that the fact that April is generally a pretty solid surplus month thanks to tax day…we are really just a bit shy of a $900B YOY swing…in 30 days!!

Revenues:

Revenues Collapsed as tax day was pushed back to July and at the same time refunds went out…we count refunds as negative revenue, so the combination reduced revenue from $552B last year down to just $44B. It’s bad, but not as bad as it looks…we should get some of that back in July…how much we will have to wait and see…maybe $100-$200B unless it is further delayed or offset.

Outlays:

Outlays increased $369B YOY including a lot of new categories including the Coronavirus relief fund (140B) and 89B sent to the Federal Hospital Insurance Trust Fund.

Bottom line here is that this was just as big of a disaster as I expected, with the headline being a little worse than reality because of the push of tax day back to July which may just be a timing event. As a one time event…this certainly looks bad and accelerates the timeline of a US default, but I wouldn’t expect any issues like that immediately…that will happen with a sudden crisis of confidence…. I of course lost confidence years ago, but my little vote doesn’t count for a lot.. Real trouble begins when the US can’t issue new debt, people start to refuse to pay taxes into a failing system, and people start to refuse payment in currency because it is obvious to all it is worthless. We aren’t there yet…but the risk of this happening is higher than ever…especially with what is sure to be a nasty election just around the corner. We may make it through this gauntlet, but what if a State or Region decides they are not OK with another 4 years of Trump…or 4 with Biden? We are a divided county on so many issues…half or more of the population is going to be quite disillusioned after the election…paying off the debts of prior politicians whom they despise is unlikely to be a high priority…in fact they might make walking away that much easier…

Just a few months ago 2020 was looking like it would be a $1.1T deficit year…revenues were up a curious amount…but so were costs.

23 days into April that has changed as we have already topped $1T on the way to what could be a $3T+ Deficit for 2020…here’s what it looks like.

$612B just in April so far. Obviously…this is getting nasty, but that’s not a surprise…this much is already baked in…. The key question in my mind…the critical variable is the medium term affect on the tax base. If this shutdown ends, and by say the end of the year economic activity is back within 10% or where we were…the charade can probably keep going on….not as long as before, but the show will go on. However…if this results in a more or less permanent 25-40% cut in economic activity that carries on into 2021+…it will be extremely hard to keep pretending this debt can be repaid.

Curiously…just yesterday Mitch McConnell suggested States having trouble with their finances should declare bankruptcy. Really!! I mean he’s right…and not just about the States…just interesting to hear it said out loud. The truth is…that those foolish enough to lend money to the states and the US government should lose ALL of their money…. and someday they will. Nobody knows when…but it will happen.

And we’re back!! I haven’t done a post since the end of 2018 when we were knocking on the door of a $1 Trillion dollar deficit, but I have been diligently tracking the deficit. What I have known for a while is that as long as we could add debt at near zero rates….this game could go on for a while and of course it has.

I always figured the most likely trigger for default would be a recession that cut revenues and exploded costs and it looks like that theory is about to be tested…though of course I never imagined anything like this. April, usually a solid ~$150B or so surplus month is now looking like it may post the largest deficit EVER as tax day was pushed back to July, regular inflows are slowing, emergency refunds are getting sent out and spending is exploding. through 15 days we are running a $425B deficit compared to the largest I have on record….$262B last February. The largest Deficit of 2009 was $231B.

So where to from here? There is a lot of uncertainty….is this a couple month fluke and then the economy settles back at say ~90% of where it was by the end of the year? Or did we just whack 30% off GDP for years? Nobody knows…surely not this guy.

The TTM revenue had been about $3.8T…let’s assume we end up losing about 20% of that and only get revenues of $3.0T over the next 12 month period.

On the cost side..we were probably going to spend $4.9T before Corona. The CARES Act headline is $2.0T…but some of that we have already captured in the above as revenue reduction….the rest, kind of hard to say…I will be conservative for now and just say +$1T over the next 12 months getting us to $5.9T of spending vs $3.0T of revenues giving us a $2.9T deficit.

That’s a wild ass guess….but it’s a decent starting point we can refine over time…let’s just call it $3.0T deficit over the next 12 months. My gut is….given how un-investable this stock market is they can pull this off (safety right??)…and successfully issue $3T of new debt… growing from $24B to $27B… in the next 12 months…all issued at near zero rates. That’s nasty, but if it’s a one time hit…probably possible…probably. But if it starts to look like the new normal….if Corona wipes out whole industries and fundamentally changes life and how we interact with each other…that could be the trigger that knocks down our pretty mansion of cards.

Right now…huge uncertainty all over the place, but let’s start there…Stay tuned folks…this is about to get (more) interesting 🙂