March 2013 Fiscal Snapshot
| Month | Total_Withdrawals_TGA | Pub_Debt_Redemption | Net_Withdrawals_TGA | Tot_NG_CreditMkt_Debt |
| oct | 933 | 589 | 344 | |
| nov | 1035 | 643 | 392 | |
| dec | 947 | 651 | 296 | 44687 |
| jan | 969 | 643 | 326 | |
| feb | 992 | 549 | 443 | |
| mar | 888 | 511 | 377 | |
| Dec-07 | 613 | 382 | 231 | 46999 |
End of month numbers are in for March now. Full month Net Withdrawals from the Treasury General Account ended up at $377B as indicated above in the table, along with the individual trailing 6-month totals.
Also included is some end of 4Q data for both December 2007 and December 2012 for comparison purposes.
At the end of December 2007, which was before the liquidations started in earnest in 1Q 2008, total non-government sector credit outstanding was approximately $47T and current, is at $44.7T, so down a bit over $2T since before the GFC. (Data from Fed's Z.1 Table L.1)
If we assume that the $47T total that was outstanding at year end 2007 was to average straight line amortize over a 15 year term, taking that $47T and dividing by 15 years and then 12 months per year would yield a flow of (47,000 / 15 / 12 = ) $261B per month required to service these non-government liabilities.
But we can see here that the total leading $NFA flow (Net Withdrawals) from the government to the non-government sector was only $231B at this time, which was inadequate to provide for the service of the $47T in non-government credit liabilities outstanding at that time. (Of course assuming the 15 year amortization of the $47T resulting in an average monthly "system nut" of $261B is an accurate assumption... best we can do for now till we get more data which the Fed probably has but is apparently using for toilet paper.)
So "cutting things this close" with fiscal policy, or perhaps worse, inadequately provisioning the non-government with minimum required leading $NFA flows to service non-government sector liabilities, was perhaps to soon foment the liquidation that we eventually witnessed in 2008 starting with Bear-Stearns in Q1 and reaching a crescendo with Lehman Bros. eventually in September, as policymakers stood idly by and watched the events unfold with their moron thumbs firmly inserted you know where while all of this was going on.
Going forward from here, it looks (for now anyway) that recent fiscal policy has been adequate to prevent such a re-occurrence of the 2008 scenario, as recent leading government $NFA injections have been WELL above the pre-GFC levels and total non-government credit is now lower than those previous levels reached in late 2007 by trillions of U.S. dollar balances.
27 comments:
So far the sequester looks like a nothingburger. If this keeps up and the stock market continues levitating, while at the same time the jobs picture moderately improves, we'll see even more slashing of the deficit.
Agreed. I find astonishing that policy makers, media pundits or financial market participants seem to ignore the fact that the federal budget deficit shrank by $206 billion in FY 2012. In other words the economic recovery, weak and tepid as it is, was nevertheless able to produce enough additional tax revenue to reduce the deficit by $206 billion or about 15% without any tax increases or any spending cuts. This suggests to me that the recovery is becoming self sustainable. Am I missing anything?
Mal,
There has been a lot of IRS tax refunds over the Feb and Mar time frame which now looks to be tailing off.... which were not part of the "sequestration" so-called....
Still trying to "dial this in" but it looks like the key flow is "around" 300B min per month on the Net Withdrawals... ie the "leading $NFA flow" ie "govt spends first then collects the taxes"....
The CR just passed was for around 165B/mo. ($1T over 6 remaining months) so the rest ($135B) has to come from the non-discretionary and supplementals if we are to reach the 300B.... may be cutting it close but nevertheless making it once these tax refunds drop off....
But imo no coincidence a strong equity market over these last few months as the $NFA injections have been substantial and well above what seems to be the minimum system requirements... of course more work to do on this...
rsp,
Ed,
Doesnt look like you are missing anything...
Looks like depends on how "lumpy" the Net Withdrawals get over the rest of the FY... If for some reason these Withdrawals decrease over a short time we could get some short term weakness but that would most likely just be made up the next month(s), this looks like what has been the pattern... (weak 4Q CY 12 for instance...)
rsp,
There's a lag time with stimulus and also with deficit reduction, no matter how said reduction is accomplished, whether by direct cuts or a robust economy that brings in larger tax receipts. So the question begs, just how much deficit reduction do we need before we start to see economic contraction and how long before it's felt in the general economy? In other words all of this reduction will eventually lead to overshoot on the reduction side, which ultimately leads to economic contraction, and as Matt said a repeat of 2008. In the meantime the deficit scolds will be pinning for more cuts, draconian cuts, if said cut are accompanied by continued economic expansion because of said lag effect, setting us up eventually for another wicked contraction in economic output.
"So the question begs, just how much deficit reduction do we need before we start to see economic contraction and how long before it's felt in the general economy?"
Malmo - Great question! Maybe the 2003 to 2007 period provides a guideline? Keep an eye on credit spreads which widened dramatically going into the 2007-08 period as well as from 1997 on with four years of chronic budget surpluses.
One way, maybe the only way, deficit reduction could accompanied by continued economic growth would be re-inflating the housing bubble. If they somehow thread that needle then we could have years of economic expansion coupled with deficit reduction. Absent that scenario, I doubt deficit reduction buys us more than one or two years of relative calm before contraction sets in with a vengeance.
The US economy may also be able to avert another recession in the face of a shrinking budget deficit if US exports increase relative to imports, i.e. a shrinking trade deficit or even trade surplus. In connection with this, the big increases in crude oil and natural gas production will be an important factor over the next 7 years because I think many estimates are projecting energy independence by 2020.
For the US CAD to be reduced other nations would have to reduced their surplus.
I don't see it happening. The only way the monetary policy in some of the surplus nations is sustainable is because the US worldwide CAD.
And these morons don't seem to want to change their ways, or maybe it's not even possible unless the dollars is heavily devalued (because these nations can't purchase much stuff that interests them in dollars, and that americans are willing to trade for anyway -ie. non-advanced tech-).
As for reducing the dependence on external fossil fuels, it's one of the best ways to reduce the leakage of CAD. But one thing to have in mind is that the CAD is not just a matter of import/export of goods, but also the function of external demand for USD, to settle payments or save in this currency.
It's hard to attack this issue as long as foreigners keep hoarding USD for no apparent reason (because they are not willing to spend them on US products anyway).
Matt,
What about taxes? Based on last year's $2.2 trillion in Federal tax collections, that's a need of about $175 bln additional per month in $NFA flows. That means we need at least $400 bln gross flows per month (debt service plus taxes) to stay liquid. Am I missing something?
Mike,
I may of course be oversimplifying:
It could be that the cohort "paying the rent" really needs the Net Withdrawal flow, and then the "rentier" cohort pays the taxes type of thing....
Then, if the cohort "paying the rent" gets cut off from this "leading flow", or if that "leading flow" drops to a level inadequate to service these liabilities, then we have a system problem...
so it may not just depend on the ex post "deficit" per se, but the actual level of the Net Withdrawal may matter in itself... it "leads", ie "govt spends first and then collects the taxes.." or "Deposits are a function of Withdrawals..."
rsp,
The way I view it, the government "stocks the pond" with it's spending and businesses hire people to "fish" for the dollars, reaping net gains.
With progressive taxation the "winners" get taxed more than the "losers", funds get re-distributed back to the bottom and government doesn't have to "print" as much new money.
We are allowing a very small cohort to accumulate an outsized portion of the stock of funds, so deficits have to be higher.
It's like a Poker game…when someone wins all the money at the table it's game over until the losers get re-funded.
I suppose they could borrow the funds but the same people keep winning (the game is rigged) so there is no chance for repayment in the case of credit.
One way, maybe the only way, deficit reduction could accompanied by continued economic growth would be re-inflating the housing bubble. If they somehow thread that needle then we could have years of economic expansion coupled with deficit reduction.
Bingo. The US economy and financial system rests on housing. Obviously, housing is responsible for a huge chunk of spending both directly and indirectly — furnishing, repair, etc.
But RE also provides the collateral for the great bulk of lending that is responsible for creating endogenous money. Increasing the value of the collateral and that potentially increases bank money — by a lot. Similarly, contract the value of collateral and contract lending and therefore bank money creation.
The Fed knows this, of course, and so they are doing everything possible to inflate housing price and driving up equities as a consequence of low-cost margin.
"We are allowing a very small cohort to accumulate an outsized portion of the stock of funds, so deficits have to be higher."
Paul agreed... Ive been thinking lately that a tax "cut" might be of no value to do this, but perhaps a tax "rebate" might as this increases Net Withdrawals, where a tax "cut" would just reduce Net Deposits, but the net liability cohort NEEDS positive flow... sort of like "you cant cut taxes for folks who dont pay much taxes to begin with"...
So the path from here may not be a political choice... we may actually have to actively increase Net Withdrawals either by tax rebates or new spending programs ... which of course is a policy that does not seem very forthcoming...
rsp,
"...we may actually have to actively increase Net Withdrawals either by tax rebates or new spending programs ... which of course is a policy that does not seem very forthcoming..."
In the political environment as it stands now, neither of these stands a snowball's chance of being instituted.
Tom,
Do you envision any possible way to reignite the RE market in a broad based and meaningful way like the primo coastal zip codes are experiencing? I know of only one way this could be accomplished on a national basis, which would be to bring back the low down payment, zero doc, liar loan business model. I wonder if that's already starting to happen again right under our noses?
Mal,
That coastal activity might be coming from Paul's "very small cohort"...
Agree that RE is going to have to start to be financed in earnest if this thing is going to get going again .... but my current experience is that the lenders are still pulling back wrt Property Loans...
rsp,
"But RE also provides the collateral for the great bulk of lending that is responsible for creating endogenous money....Increasing the value of the collateral and that potentially increases bank money — by a lot."
Right Tom but borrowing on collateral is limited by income not the value of the collateral in most cases.
The borrower has to be able to service the debt and servicing effectively lowers (net) income.
My position is that credit expansion increases liabilities faster than net income because of net saving (dollars leaving the economy to foreign holders, normal saving, retained earnings, etc, besides the fact that perfect settlement isn't possible, there are many bottlenecks in an economy).
After all, credit is merely the ability to spend savings before it has been earned.
"Agree that RE is going to have to start to be financed in earnest if this thing is going to get going again .... "
Virtually all new residential mortgage loans are being underwritten by Fannie & Freddie.
Home loan underwriters are brutal compared to even the late 80's, when I purchased my first home--and they were tough back then. I did a refi last year and even with my nearly 800 credit score they still had us sweating bullets with all the minutiae. Yet my sister told me when she purchased a $600k home in northern Va last year, she only had to put down 3%. It wasn't her first home either. Standards seem to be uneven, but maybe they are creeping more and more to the small standard scale of recent bubble vintage.
"…purchased a $600k home in northern Va last year, she only had to put down 3%"
Loans made with LTV ratios less than 20% or so is very risky business, should only be done in a very limited way.
We insist on over-leveraging…buying oversized drywall castles rather than live in sustainable functional homes of modest size.
The traditional model of home ownership is unsustainable in my view (financially).
Right Tom but borrowing on collateral is limited by income not the value of the collateral in most cases.
The borrower has to be able to service the debt and servicing effectively lowers (net) income.
That's why the no doc loan with extra points, as well aas the no down and even interest only.
Lenders know that what counts is the monthly nut and they will structure the loan terms to that in a competitive market.
"Lenders know that what counts is the monthly nut and they will structure the loan terms to that in a competitive market."
True but it seems to me that extending that kind of risky debt undermines the stability of the system. I believe we are near saturation wrt safe bounds of private debt expansion.
In order for it to be stable deficits have to be large enough to support the payments system and keep borrowers employed, otherwise...
There is currently little appetite for deficits of the level necessary to support growth. Cuts will ultimately have disastrous effects on the credit system.
"level necessary to support growth."
Right Paul, what I am looking out for here is "disaster avoidance" rather than any sort of optimization...
We have morons running this thing who dont know what the f they are doing or what to look for imo.... scary.
rsp,
RR,
I think most peoples experience are from one degree or another just as you describe yours. Black and white ideological labels apply to very few individuals.
Tom,
Saw this regarding housing:
http://www.washingtonpost.com/business/economy/obama-administration-pushes-banks-to-make-home-loans-to-people-with-weaker-credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_story.html
Looks like the reflation is catching steam.
I think that that was supposedly the deal for the govt bailout in the first place. The banks reneged.
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