Tag Archives: Deficits

Breaking down America’s worst long-term challenges: #1- Debt. By Simon Black

Debt is the US’s worst long-term challenge, and it leaves all the others in the dust. From Simon Black at sovereignman.com:

On October 22, 1981, the national debt in the United States crossed the $1 trillion threshold for the first time in history.

It took nearly two centuries to reach that unfortunate milestone.

And over that time the country had been through a revolution, civil war, two world wars, the Great Depression, the nuclear arms race… plus dozens of other wars, financial panics, and economic crises.

Today, the national debt stands at more than $21 trillion– a milestone hit roughly two months ago.

This means that the government added $20 trillion to the national debt in the 37 years between October 22, 1981 and March 15, 2018.

That’s an average of nearly $1.5 BILLION added to the national debt every single day… $62 million per hour… $1 million per minute… and more than $17,000 per SECOND.

But the problem for the US government is that this trend has grown worse over the years.

It took only 214 days for the government to go from $20 trillion in debt to $21 trillion in debt– less than eight months to add a trillion dollars to the national debt.

That’s an average of almost $52,000 per second.

Think about that: on average, the US national debt increases by more in a split second than the typical American worker earns in an entire year.

And there is no end in sight.

At 105% of GDP, America’s national debt is already larger than the size of the entire US economy. (By comparison the national debt was just 31% of GDP in 1981.)

Plus, the government’s own projections show a steep increase to the debt in the coming years and decades.

The Treasury Department has already estimated that it will borrow $1 trillion this fiscal year, $1 trillion next year, and another trillion dollars the year after that.

They’re also forecasting the national debt to exceed $30 trillion by 2025.

To be fair, debt isn’t always bad. In fact, sometimes debt can be useful.

Businesses and individuals use debt all the time to shrewdly finance productive investments.

Real estate investors, for instance, often borrow most of the money they need to purchase a property once they determine that the rental income should more than cover the debt service.

In this way, when applied prudently, debt can actually help build wealth.

To continue reading: Breaking down America’s worst long-term challenges: #1- Debt

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The US Just Borrowed $488 Billion In One Quarter, The Most Since The Financial Crisis, by Tyler Durden

This borrowing comes as the economy is supposedly booming. Where does it go during a recession? From Tyler Durden at zerohedge.com:

For months, analysts have been warning that the US is set to borrow an unprecedented – for a non-recessionary period – amount of money…

and on Monday afternoon this was confirmed, when the US Treasury announced that in the quarter ended March 31 (the fiscal year’s second), the US borrowed $47BN more than its had anticipated three months ago, or $488BN to be precise.

This was the single biggest quarterly amount of debt sold by the US Treasury since the record $569BN in debt borrowed in Q4 2008 when the financial system nearly collapsed, and Treasury had no choice but to raise a gargantuan amount of money during the biggest financial crisis in modern US history.

What makes the just passed quarter different, however, is that there was no crisis, not even a recession. In fact, in the first quarter US GDP rose by 2.3% according to the BEA amid what, until recently, the “experts” said was a global coordinated recovery.

In retrospect, it appears the “recovery” was only around long enough for the US and/or China to raise near record amounts of debt.

As a result of the near-record borrowing spree, the US ended the quarter with $290BN in cash, more than the $210BN budgeted.

What is scary is how fast the US is raking up the debt: as a reminder, just a few weeks ago we reported that in the first six months of the fiscal year, the US budget deficit rose to $600 billion as spending increased at three times the pace of revenue growth in the October-to-March period. At that run-rate, the US deficit will soar to $1.2 trillion for fiscal 2018, far above the $804BN projected budget gap and resulting in an even greater amount of debt borrowed.

Commenting on the debt splurge, the Treasury said tax changes are “poised to underpin near-term consumption and investment” and “the stage is set for a pick-up in growth over the near term.”

They better, because if all we have to show for nearly a half a trillion in debt in one quarter is 2.3% GDP, then the US is in very serious trouble.

To continue reading: The US Just Borrowed $488 Billion In One Quarter, The Most Since The Financial Crisis

Deutsche: Is The US Headed For An Imminent Debt Crisis? Here Are The Signs, by Tyler Durden

The US is certainly headed for a debt crisis, whether it’s imminent or not depends on how you define imminent. From Tyler Durden at zerohedge.com:

The thesis is simple and familiar: the United States is running a fiscal deficit and a current account deficit (i.e. “twin deficits”) and relies on domestic and foreign investors to buy US Treasuries.

The  bigger the fiscal deficit is the more Treasuries investors – including the Federal Reserve – need to buy. At the same time, the more Treasuries that have to be sold, the highest the interest rate all else equal… until something snaps (or unless an stock market crisis forces the Fed and investors to monetize/park cash in Treasurys).

This was, in a nutshell the grim message from the IMF’s latest Fiscal Monitor Report, which warned that the US would be the only country with growing debt levels over the next 5 years.

What the IMF did not elaborate on, however, is that in many countries, such twin deficits have resulted in a debt crisis. So, picking up where the IMF left off, Deutsche Bank conducted an analysis which found that “the deteriorating fiscal and external situation for the United States have increased the probability of a US debt
crisis by 7 percentage points, from a historical average below 9% to a level around 16%.”
More details:

As shown in Figures 10 and 11 below, the model-implied odds of a crisis are set to tick higher over the next several years as government debt levels increase and the current account deficit grows. Indeed, the probability tends to rise to an abnormally high level outside of recessions. The pre-crisis average was around 9%; the next four years will average a bit more than 15%. This is mostly due to wider fiscal deficits, which we expect to widen to around 5.0% of GDP in each year through 2022. Fiscal expansion will boost growth this year, partially reducing the odds a crisis in the very near-term, but this effect will fade over the forecast horizon as growth slows down to its long-term trend and fiscal deficits remain large.

To continue reading: Deutsche: Is The US Headed For An Imminent Debt Crisis? Here Are The Signs

“Worse Than You Think” – 8 Reality-Checks From Last Week’s CBO Report, by David Nevins

CBO reports on the government’s finances make for grim reading, but probably not grim enough. From David Nevins at ffwiley.com:

For what they’re worth and for anyone who doesn’t mind digging through the weeds, here are my comments on last week’s budget outlook from the Congressional Budget Office, which I previewed here.

  1. In the baseline scenario that’s widely reported in the media (I’ll abbreviate it BS for this post), the CBO shows federal debt held by the public soaring from 76% of GDP at fiscal year-end in 2017 to 96% of GDP at the end of the ten-year forecast horizon in 2028.
  2. The CBO also restored its alternative scenario (AS), which adjusts for certain constraints on what it’s legally allowed to include in the BS, making it more realistic than the BS. Unfortunately, the AS didn’t appear in annual reports between 2014 and 2017—in those years, the CBO highlighted areas where its BS projections were likely to be wrong but without producing an alternative. Even though it gets only a fraction of the attention given the BS, it’s good to see the AS back. It shows debt held by the public rising to 105% of GDP by the end of 2028, compared to the baseline’s 96% of GDP.
  3. But the AS is also optimistic, partly because it uses the same rosy economic assumptions as the BS and partly because it includes less “emergency” spending than the BS.
  4. As for the economic assumptions, the CBO’s unemployment rate projections are lower than they were last year in every projection year. They show an average unemployment rate for the next ten years of 4.4%, which is almost a third lower than the 6.2% historical average over the past forty years (see the chart below) and at least 0.4% lower than in any other ten-year projection the CBO has ever produced.
  5. For perspective, consider that the Bureau of Labor Statistics shows only one historical ten-year period during which the average unemployment rate was as low as the CBO projects today. That one period was from 1948 to 1957, when the unemployment rate averaged 4.4% as in the CBO’s current projection, but it’s hard to imagine the average would have been that low had the Korean War not pushed unemployment firmly below 4% for 35 consecutive months.

To continue reading:  “Worse Than You Think” – 8 Reality-Checks From Last Week’s CBO Report

The Other Raiding Party, by David Stockman

Bush doubled the national debt, Obama doubled the national debt, and there’s a better than average chance that Trump will do the same. From David Stockman at davidstockmanscontracorner.com:

While the FBI was raiding the offices of Trump’s lawyer yesterday afternoon, the CBO published a blockbuster report evidencing the Donald’s own raiding party. To wit, in roughly 90 days of fiscal madness between December and February, Trump and his GOP allies piled $459 billion onto next year’s (FY 2019) deficit.

That eruption of red ink consisted of $285 billion for the tax bill and $174 billion of spending add-ons for defense ($56 billion), domestic programs ($105 billion) and additional debt service ($13 billion). For FY 2019 alone the added debt amounted to 2.3%of GDP, and turned an awful fiscal situation into an outright disaster.

Indeed, the real “watershed moment” yesterday was not that Mueller went after the keeper of Trump’s legal skeletons, but that CBO let the real monsters out of the fiscal closet, translating Trump-O-Nomics into the scariest budget numbers ever seen.

Namely, a public debt that reaches $33.85 trillion (130% of GDP) by 2028 and that’s not our projection; it’s right there on p.87 of the CBO’s official report.

Moreover, that’s the good news part of the report. But to believe that the public debt is only heading for 130% of GDP during the next 10 years, you have to believe in Rosy Scenario economics and be OK with the crooked book-keeping forced on CBO by our estimable legislators.

As we show below, grab some sober economics and honest fiscal book-keeping—and the public debt number 10-years out is actually $40 trillion and 150% of GDP. And there’s no conceivable way to dig out from under it because the tsunami of baby-boom retirements and the associated Welfare State fiscal costs are insuperable.

The CBO report lets some skeletons out of the closet on that point, too. Thus, combined social security and medicare costs will rise from $1.8 trillion in FY 2019 to $3.3 trillion by FY 2028 owing to the rolls rising from 60 million to 80 millionbeneficiaries, as well as cost of living adjustments and medical care inflation.

Needless to say, the remaining accounting “solvency” of the OASHDI (old age, survivors, hospital and disability) trust funds will quickly evaporate under this spending wave. In fact, the trust funds’ cash deficit in the coming year will total $108 billion, rise to $504 billion by 2028 and then head into the trillions shortly thereafter. And that’s per year!

In short, what’s coming is a monumental Welfare State crisis owing to the fact that the vaunted trust funds are rapidly going bust. Just in the FY 2019-2028 period they will be collecting nearly $2.8 trillion less in income from the payroll taxes than the benefit costs which the retired population will be entitled to under law.

To continue reading: The Other Raiding Party

Q1 2018 Was A Disaster For America, by Chris Hamilton

In the first quarter, federal debt grew $621 billion. The US economy grew, if you can call it that, $110 billion. So ever dollar’s worth of growth cost over five dollars. That sounds like we’re heading backwards. From Chris Hamiton at economica.com:

In the first quarter of 2018, the financial and investing industry went into overdrive detailing the upside of the 2018 tax cuts and the positive impacts of a “business friendly” executive and congressional branch on business in America.  The stock market hit record highs and the Federal Reserve proclaimed such good times as to raise their economic outlook and increase the likelihood for interest rate hikes.

From January 1, 2018 through March 28, 2018 (Q1), real GDP likely grew $110 billion (a 2.5% rise on an annualized basis).  However, the fly in the ointment…according to the Treasury, from Jan 1, 2018 through March 28, 2018 (Q1), federal debt rose by an astounding $621 billion dollars (a 13.1% increase on an annualized basis).  The chart below shows the quarterly change in federal debt versus the quarterly change in real GDP since 2000.  Q1 2018 was the second largest quarterly growth in federal debt, only surpassed by the massive free spending of Q4, 2008.

Or, if we just subtract the quarterly growth in federal debt from the growth in real GDP…chart below. 

Unfortunately, Q1 2018 is one of the worst quarters on record with the growth in federal debt doing laps around the “growth” in Gross Domestic Product (which of course counts all the federal debt fueled activity?!?).  Incurring over $621 billion in new debt (to be serviced ad infinitum) to produce just over a $100 billion in new economic activity is something only government could achieve.

However, it gets downright miserable if you add in the massive $500 to $750 billion quarterly growth of unfunded liabilities alongside the growth in federal debt.  Together, the UL’s and federal debt are rising $3 to $4 trillion annually while GDP is rising around a half trillion.  The tax cuts and fast rising costs of social programs will continue to see deficits rise far faster than economic activity or resultant tax revenue.

How this can be reason for celebration…well, I guess it’s all a matter of perspective.  The US can never grow it’s way out of this hole…but the Fed and federal government is the best leadership money can buy.  In real time they are choosing (and aligning themselves with) the minority who will end up winners and leaving everybody else to endure the losses as this all shakes out.

To continue reading: Q1 2018 Was A Disaster For America

Treasury Admits It Lost $1.2 TRILLION in 2017, by Mark Nestmann

The US is broke, and the Treasury’s own report admits it. From Mark Nestmann at nestmann.com:

In 1971, President Richard Nixon told an ABC News reporter that he was “now a Keynesian in economics.”

Nixon’s statement was an acknowledgment that he agreed with the ideas of John Maynard Keynes. Keynes was an economist whose theories once underpinned the economies of every major country.

Nixon’s endorsement of Keynesian economics was shocking. To understand its impact at the time, consider how the world would react today if the leader of ISIS converted to Christianity. Or if the National Rifle Association endorsed a ban on semi-automatic weapons.

Nixon’s statement was astonishing because one of the fundamental precepts of Keynesian economics is that governments must intervene in the economy to ensure “optimal outcomes.” To economic conservatives, this was dangerously close to socialism or even communism.

Keynes believed that business cycles – periods of expansion followed by recessions – are the inevitable consequence of capitalism. Free-market economists believe governments should not intervene in the business cycle support economies in recession. Keynes thought intervention was a fundamental duty of government.

During the Great Depression of the 1930s, Keynes advocated for governments to reduce taxes and increase public spending to spur employment. Keynes acknowledged that this policy might require deficit spending. But he believed budget surpluses when prosperity returned would make up for the deficits.

Once Nixon embraced Keynesianism, resistance by economic conservatives – and the Republican Party – faltered. The last Republican president who didn’t endorse Keynesian economics was Dwight Eisenhower, who left office in 1961. Ronald Reagan, George Bush Sr., George Bush Jr., and now Donald Trump have all embraced cutting taxes to spur the economy.

That brings us to 2018. February 15, 2018, to be exact. That’s the day that Treasury Secretary Steven T. Mnuchin signed off on a report with the mind-numbing title Fiscal Year 2017 Financial Report of the United States Government.

To continue reading: Treasury Admits It Lost $1.2 TRILLION in 2017