Matt Franko has been posting updates from the Daily Treasury Statement that show Dec and the current month running well shy of the deficit levels needed to ensure sufficient $NFA's to keep the system stable. In December, Treasury ran a $20 bln surplus and so far this month Treasury is running a meager -$29 bln deficit. This is far below the historical average of the past year of -$90 bln deficit per month. A surge in bank credit likely reflects people and firms grasping for some liquidity. Banks may continue to provide this, it's hard to say, but the longer we go like this the greater the likelihood of some "liquidation event" that brings the system back into equilibrium. Remember, too, that higher tax demands as of Jan 1, mean that the historic -$90 bln deficit per month is probably low.
30 comments:
Mike & Matt -- Looking at yesterday's statement it appears that Treasury is only $25 million shy of the statutory limit. Is that right? Not very much to work with.
Hey Mike,
How do you calculate how many NFAs are sufficient to keep the system stable?
Mike,
What does House votes to suspend debt limit mean?
Quote:
House Republicans voted to suspend enforcement of the debt ceiling through May 18
They did not INCREASE the debt limit but suspended enforcement. Does that mean, that the Government is free to issue as much debt as it wants till then? Or does it mean that the law will not ne enforced till then, and the debt ceiling remains. In other words, if you pass the debt ceiling, then after May 18th you are in a lot of hot water, for now the debt ceiling law can be enforced, and that the administration wold have been deemed to have violated the law.
"How do you calculate how many NFAs are sufficient to keep the system stable?" - Geoff
Trade deficit (leakage) - $500B
+ Debt service on Consumer Debt: (11% of 12.9T =) $1400B + ∆Corporate Profits + ∆Savings…or…
$1.9T + ∆Corporate Profits (CP) + ∆Savings (GPSAVE) + ∆Trade deficit
Since the current deficit is about $1.1T, the balance has to come from dis-saving, lower-profits and/or lower imports/higher exports or a combination of all three…(or increased private debt which would only make things worse in the long run).
Paul -- Is that 11% debt service figure published anywhere, or is that a knowledgeable estimate by you. I know mortgages are lower in most cases, but then there are credit cards, etc.
Geoff:
Corporate tax of $25 bln per month and the trade deficit, $40 bln(leaving the other stuff, like savings and the level of profits) means a minimum of $65 per month. Otherwise there's not enough $NFA to pay taxes and keep us supplied with energy. Non-gov't savings disappear quickly and the whole thing collapses.
sam seder shows his love for schittreport in his live radio broadcast:
http://www.youtube.com/watch?v=hlSU73gwzIA
"Paul -- Is that 11% debt service figure published anywhere, or is that a knowledgeable estimate by you. I know mortgages are lower in most cases, but then there are credit cards, etc." -John Z
John, I calculated the weighted-average of outstanding mortgages (30 and 15-year), car loans and credit card debt.
$9805T in mtgs @5% avg split 50/50 >> 7.9% annual pmt.
$1992T in car loans @ 5% avg >> 22.6% annual pmt.
$600B C/C debt @ 2% min. monthly pmt >> 24% annual pmt.
Weighted avg >> 11.1%
It's possible the average mortgage rate is lower than 5%.
Clonal,
Beo thinks they can only issue USTs commensurate with "bills that come due" vice Treasury using this opportunity to issue $Trillions.... darn!
A report I heard said that at the end of this period the ceiling will just automatically adjust up to whatever new amount of USTs have been issued....
So correct they havent "raised the ceiling" they have suspended the whole concept of the ceiling for a while...
rsp,
John,
They just stopped there at end of December.... didnt want to go right to the ceiling as this 25B gives them a little flexibility I'm sure...
But they have been right there since end of December....
rsp,
Paul,
Since December 1, net, only +9B of $NFA injection... scary!
(govt will probably start to brag about this soon!)
Prior to December, Oct and Nov were +120B and +180B respectively.... which was very substantial... but also September was -59B .... seems like we are right on "the edge" as Mike has ttm injection at about +90B/mo average which resulted in just above as Warren sez "muddle thru"...
If we are on to something here, we should start to see some instability soon unless govt starts to "push" $NFA into the system or non-govt sector gets "paid" a lot pronto...
A "push" would be like in 2008 when Bush/Cheney sent out the $650 checks over 3 months just after BearStearns in March... that totaled $165B IIRC or $55B/per month and held things off until September when Lehman blew up after Bernanke refused to provide liquidity to banks and dealers ... and then Paulson had to go the fiscal route with the 350B TARP "push" which was followed up by the Obama 2009 "stimulus" push... etc.. but now all of that is gone from the scene...
Politics will not allow any sort of "push" right now in fact with the 2% FICA increase and "sequestration" and austerity in serious view, just the opposite! Scary!
Paul, one observation I have is that Social Security is always in surplus which means SS is a net perpetual monthly $NFA leakage... SS surplus probably more than offsets the entire interest paid on US Treasury securities...
Looks like the system depends almost wholly on discretionary spending levels (DoD/DoE/NASA, etc..) as the non-discretionary programs actually operate in net surplus or "balanced budget" mode...
Seems like discretionary spending exhibits "lumpy" withdrawals for some reason then you see these types of periods like over the last two months where the deficit collapses and instability can result...
What causes the discretionary spending to be "lumpy"? This should be investigated... taxes that have to be paid REGULAR and MONTHLY are NOT "lumpy"... govt should monitor this and make sure the non-govt sector is at least getting enough balances to pay taxes next month imo.... that might be a good start at least...
rsp,
"we should start to see some instability soon unless govt starts to "push" $NFA into the system or non-govt sector." - Matt
Matt, no matter how much businesses spend on wages they always net extract more out so this is not an option. Any initial boost will be followed by lack of sales due to lack of income injected by the government.
Short of $NFA creation our only options are drawing down of savings and debt expansion.
Most people will not draw down their savings for discretionary consumption, and if they have to do it for survival we are in real trouble.
Expansion of private debt is not going to work either...I believe we are at a stalemate where the only choice is bigger deficits or contraction is inevitable. Beyond that our trading partners would have to start drawing down their savings and buying more of our stuff. When pigs can fly.
Your S/S observation is spot-on. It's a huge drag and dropping FICA would be a huge boost.
I never include S/S in $NFA but it is in fact $NFA held in trust...it's government spending that is "saved" for future expenditure. Phantom $NFA.
Matt,
Beo did point out that the US has been operating without a budget since September on a continuing resolution. The continuing resolution expires on March 27th. So we revisit the whole debt ceiling/austerity issue starting next month.
The Kabuki continues apace!
Sorry, I was sloppy in my first comment...
The equation should read...
$1.9T + ∆Corporate Profits(CP) + ∆Savings(GPSAVE) + ∆Debt(CMDEBT) + Deficit = 0
This is a sum of leakages and offsets.
The sum of the nets must always equal zero (signs must be applied properly).
$1.9T is effectively a constant until something major changes.
The deficit is a negative number relative to leakages.
∆(+) adds to leakage, ∆(-) subtracts.
So for example a draw-down in savings would be a subtraction.
Something's gotta give.
Good stuff, Paul. Thanks. You too, Mike. I hadn't really thought about it in terms of Corporate Tax + Trade Deficit before.
Clonal,
IIRC without the CR, we would have a govt "shutdown" like the Newt Gingrich people engineered back in the 90s.... but the non-discretionary spending that was under "automatic appropriation" would continue and "bills" would continue to be paid wrt the discretionary... so some $NFA flow would continue, albeit at a reduced rate... rsp,
Paul Most people will not draw down their savings for discretionary consumption, and if they have to do it for survival we are in real trouble.
Seems to be happening now.
The US govt doesn't actually operate on a budget. The budget is just a "guideline" that is seldom followed to the letter. The US operates on appropriations bills and they get hammered out politically, budget be damned. The budget is part of the kabuki.
"Paul Most people will not draw down their savings for discretionary consumption, and if they have to do it for survival we are in real trouble."
Seems to be happening now. - Tom
GPSAVE has been level over the past year after increasing by $200-$300B per year for several years...not good.
Re the equation I presented above, debt service includes an interest component...about $600B...so the equation I presented should read:
$1.3T + ...
CP, GPSAVE and CMDEBT are nearly flat over the current year so the numbers are pretty close.
Looks like the spending gap will be requiring a bigger deficit outcome so we'll have to wait and see how it shakes out after tax revenues are accounted for.
" The US operates on appropriations bills and they get hammered out politically, budget be damned. "
Tom that is a key point that is often overlooked in the MSM reporting...
This whole thing is sort of "inside baseball" and you have the Budget Committee people warring against the Appropriations Committee people...
From what Ive heard anecdote wise, the appropriators think "you're not the boss of me!" wrt the budgeteers...
That could be changing but we'll see... it's the budgeteers that are getting all bent out of shape wrt the "deficit" and "debt"...
rsp,
paul, people have been borrowing more recently, and some have taken it as a sign that deleveraging is mostly over and consumers are borrowing again. Others are saying that people are having to sell assets and borrow just to make cash flow. I'd say the latter are correct.
"people have been borrowing more recently..." - Tom
Tom, not according to CMDEBT. Household debt has declined by some $50B in 2012 so far.
If we're talking about businesses borrowing that's a completely different animal. If true, they are borrowing against...future losses, because consumers have less money to spend, and Obama's goal is to reduce it even more.
Everyone appears to be flying blindfolded.
Matt, it's well-known by insiders that the chairs of the appropriations committees are the ones that actually determine fiscal policy. The budget committee has no actual power over the purse.
U.S. consumer credit jumps again in November
US consumer borrowing rises to record $2.75T (October)
Tom, it's all about the nets...
According to the articles you linked to the so-called increases are minuscule.
Credit-card debt and auto loans can be increasing as mortgages are paid down...net is still down.
We aren't even close to being out of this....
Could be the 'student loan' portion Tom...
Which since now the govt is the actual lender on virtually all student loans since 2010 is tantamount to students signing up for a new voluntary tax...
ie student loans create fiscal drag via the interest on the loans where only the balances for the tuition are created at loan origination...
they are like the SS being in perpetual surplus... the fact that we have student loans now means we have another permanent fiscal surplus there (student loan interest)...
rsp
"Sequester cuts looking harder to undo"
http://blogs.marketwatch.com/election/2013/01/24/sequester-cuts-looking-harder-to-undo/
Mal,
That is the next thing we have to get a handle on..... rsp
http://www.nakedcapitalism.com/2013/01/richard-koo-debunks-the-deleveraging-is-almost-done-american-consumer-getting-ready-for-good-times-meme.html
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