Sunday, December 12, 2010
Your debt.......mine and yours.......OURS!
With little fanfare, the November budget deficit of $150.4 billion was reported, which happened to be the worst fiscal November in the history of the US, and just out of the top 10 of worst deficit months ever, including the traditionally weak seasonal months of December, April and September (indicatively, the worst deficit month was the February 2010 $221 billion). The deficit was a major surprise to all those who had expected a pick up in income tax revenues. And as the charts below demonstrate, while there was indeed a modest pick up in tax collections, it was nowhere near enough to offset the surge in government outlays (even with interest payments still at near record low levels). What was also not broadly appreciated is that the cumulative debt issuance over deficit funding has hit a new all time high of $1,735 billion since our October 2006 starting point (4 fiscal years ago). And what is a bigger concern, is that the debt issuance continues to remain at almost exactly 50% over the deficit. Additionally we know that courtesy of Obama's latest stimulus for the wealthy (and everyone else) the latest projection for the 2011 budget deficit will hit $1.5 trillion (after it was just $1.1 trillion a few months prior). What this means is that should the US Treasury continue to issue 50% more debt than total deficit needs, by the end of fiscal 2011, the US will have issued another roughly $2.25 trillion in net debt. Granted this is a rule of thumb. But what it means is that the $900 billion in notional (not market) value of bonds to be bought back by the Fed through June will be woefully insufficient, and that as a result we expect that Ben Bernanke will be forced to monetize another $1.2 trillion in debt to continue with his course of monetizing every dollar of deficit spending, as he has been doing since the advent of QE2. It also means that unless something dramatically changes, through October 31, 2011, total US debt will be $15.9 trillion, up from the $13.9 trillion as of the end of last month, and will mean that the debt ceiling will have to be raised not only once, but likely twice in the next 12 months. We are now truly a banana republic you can believe in.