Charting America's Brief Trip In And Out Of Austerity... And Onward To Complete Disaster

Tyler Durden's picture

One of the "positive" side-effects of the Treasury's plundering of retirement accounts is that total US debt in June actually declined for the first time since January 2010, dropping by $1.6 billion from the May 31 closing print of $14.344 trillion. No doubt this was predicated by the US Treasury officially breaching the debt ceiling on May 16. Yet due to this, or for some other reason (and it is not a surge in net income tax receipts as these appear to have reached an inflection point earlier in the year and are now trendlining lower on a Y/Y basis), something else happened: the slope on the cumulative deficit line since the start of the depression in December 2007 (see below), is now the shallowest it has ever been. In other words, the US over the past few months, faced with the threat and now reality of a debt ceiling breach was actively cutting spending, while benefitting from a transitory spike in income tax revenues, although unfortunately now that the unemployment rate is back on the trendline to double digits, this will be the only true transitory thing about the US economy. Whether this actual, factual fiscal prudence was conscious is unclear, however the result is clear: faced with the threat of being unable to finance every single dollar in perpetuity, the US government's involuntary self-imposed austerity actually... Worked! And yes, the direct side effect is that Q2 GDP is now likely to come at 1.6%: the worst quarterly increase since... Q2 of 2010 (recall that 2010 Q2 GDP was revised from 2.4% to 1.6$ on August 27 last year... hours before Bernanke announced QE2 ). And there once again is the glaring correlation between the slowing of the economy and the decline in debt issuance, and the actual deficit "improvement." Now take this slower deficit growth, and assume it actually is reversed, i.e., America has a budget surplus. While great for the country in the Long-Run, it would mean that GDP, which is now purely reliant on how much debt Geithner can issue, it would mean a collapse in the GDP, in the S&P, and in Wall Street executives' bank accounts. At least in the absence of QE3, 4 and so forth...

Another way of looking at this "austerity" data is the divergence between cumulative debt and cumulative deficit since December 2007. Since the Depression ver 2, the US generated $3.982 trillion in deficits, while adding $5.194 trillion in new debt (from $9.15 trillion to $14.343 trillion). However, what is notable is that June saw the lowest difference between cumulative deficit and debt, with "just" 30.4% more debt being issued than deficit had to be funded.

Unfortunately this "austerity" will be short-lived for two reasons. First, once the debt ceiling is raised, the nearly $260 billion in plundered retirement trust funds will have to be promptly reinvested. This means that over the next 3-4 months the Treasury will issue a whopper of short-term debt, as it scrambles to catch up to the historical Bill average as a percentage of total debt (which as we observed recently, has plunged). Second, it means that with deficit expenditures no longer having a medium-term bottleneck, deficit spending will literally explode in the next several months, which, due to the catch 22 nature of deficits and their debt-based funding, means that Treasury issuance will jump even more than just the Bill trendline "catch up" implies.

Bottom line, enjoy this slowdown in the speed of the US Titanic while you can. After August 2, we are fully convined the Treasury's bond issuance dial will be turned to the rather unfortunate "ludicrous speed."

The sad truth is that while an American's technical default will certainly not be as bad as all claim (yes, financial markets are rather adaptive ecosystems, and following a day or two of massive pain mostly for the Status QuoTM, things will stabilize) this last chance to fix the evils that came about with promoting moral hazard to the de facto only investment thesis 101, will be promptly gone. Alas, every single time something, anything, threatens the status quo's existence, the biggest threats start flying. What we can be sure is that while it took just under three years between Mutual Assured Destruction episode 1 when Paulson waved a three page blank check termsheet to Congress demanding supreme fascist rights, and the current MAD episode 2, MAD part 3, in keeping with the ever decreasing half life of government intervention and "bail outs", will come far, far sooner. Then MAD part 4 will arrive just after and so forth. At that point, threats about the end of the world will actually be true. However, they will be true no matter what choice is ultimately taken.

And speaking of end of the world scearions, here is Citi's somewhat sober and very detailed look at what will happen should the US default now (all with pretty charts). What is left unsaid is that this same analysis will be infinitely uglier the next time it has to be done, with the opportunity cost of doing the right thing being far greater than even now, as the global financial system shifts even further from equilibrium under the disastrous guidance of global central planning.

From Citi:

Gradually now the questions are coming in. “What will happen if the U.S. government defaults on its debt after August 2?” It’s still nearly unthinkable. The exact date may not be as precise as advertised. Predictably, more of these questions come from distant shores. But the longer Congress lingers, the more frequently the question will be asked.

Some part of this question is in the realm of “what will you do after you commit suicide?” While conflicting in substance, rumblings from Washington in the past week suggested action could be imminent. Of course something seems likely to get done. But to take the question seriously, if the U.S. could spend only its revenues, spending would need to be slashed by about 40%, or over $100 billion per month. That’s about 8% of current GDP non-annualized. If all checks from the Treasury were cut in size but not eliminated, legal obligations such as Social Security Payments would have to be cut by roughly $25 billion per month, or $300 billion at an annualized rate1. This is money that is spent in the U.S. economy, as are the payments for military personnel salaries, federal contractor payments and pension contributions that sum to larger amounts.

We doubt that even the most extremist of policymakers believes that private economic activity will immediately fill the void left by so large a drop in these deficit-financed “income” streams. Their many constituents would let them know the personal impact whatever the perceived benefits (see figure 1). If the U.S. Treasury was determined to make U.S. interest payments on the notion that if it does not, the U.S. might be required to spend only its revenues for far longer, than other outlays would need to be cut nearly 50% rather than 40%.

A near immediate income decline of 8%-9% of GDP, and the uncertainty around policy, would weaken expectations priced in asset markets, reducing economic activity by an even larger amount before long. Such would be the likely case even if Treasury debt payments were maintained and “prioritized.”

In the event of a Treasury debt default, we would note that U.S. Treasuries are a key risk-free asset on bank balance sheets across the world and the single-largest form of loan collateral. The U.S. Treasury is the ultimate guarantor of bank deposits. The financial implications of an actual Treasury default, even briefly, could represent the largest financial shock in history, potentially creating a domino of defaults. As such, creating quantitative economic projections on a default scenario seems like a foolish errand.

Scared yet? Good. That is precisely Citi's goal.

Unfortunately in the same note, Citi also shares some other charts, all of which indicate that no matter what happens this week, or at 11:59:59pm on August 2, the long-term fate of the world's premier entitlement state is one which ends in disaster, and if history is any indication: war... Only this time everyone has the same just as destructive toys.

To wit:

The astounding growth rates for healthcare outlays both past and present – not matched by revenue streams – will unravel most any other structural changes in the budget given enough time (see figures 3-5 and “U.S. Budget: Why is a 9% Growth Rate for Healthcare Necessary?” April 25, 2011). As such, any long-term changes that matter will affect the health care budget.

Even the words “healthcare budget” seem at odds with the way Americans consumers and policymakers view healthcare - essentially “priceless.” It seems clear that a nation that spends double the developed country average on healthcare for sub-standard aggregate outcomes misallocates healthcare resources and almost certainly overspends in the process (see figures 6-7). As a practical matter for investors, one might want to question whether the long-term secular rise in the healthcare sector’s share of U.S. corporate profits will be allowed to continue unchallenged (see figure 8).

For short- to intermediate-term budgets, the latest three months of rising unemployment provide a reminder that it’s poor timing for macro tightening steps if there is any choice.

Having at least a “down payment” toward significant long-term structural budget underway could help with flexibility in running large budget deficits for the time being. In observable modern times, the U.S. has never improved its budget position during periods of rising unemployment or below-trend economic growth (see figure 9).

Reread the last sentence from Citi as it delightfully captures the Catch 22 nature of the problem. In its overarching attempt to take sole control of the US economy, funded with ever cheaper debt, the US government has now become a central planning behemoth the likes of which the USSR could only hope to emulate even in its heyday. And the lifeblood on which this behemoth lives is one: exponentially more debt. Which is why, more than anything, nobody in DC can possibly demonstrate the political will, which also equates to immediate career suicide, to do the right thing - in this case just say no to more debt - as it would mean one thing and one thing only: putting the fate of their country over and above their own career prospects, as this will expose the biggest lie: the welfare state that is the United Socialist States Of America is more naked than any emperor in history.

And as is well known, no career politician has ever cared enough about their country enough to actually see their own future as merely secondary to that of the United States.

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NuckingFuts's picture

Eat your peas, bitchez

Mr Lennon Hendrix's picture

People do not deserve any wealth, only bankers deserve wealth.  Bankers rule!

NuckingFuts's picture

Bankers can have the Lima Beans, I hate that shit.  I want my fucking peas!

Anonymouse's picture

Works for me.  I like peas and lima beans (tip:  cook them with ham and make a sort of gravy.  You're probably eating them too dry).


Too bad the budget is harder than your lima beans.  Still, it seems to me if spending went up by about $1.5T per year since 2008, why is it supposedly impossible to cut it back to 2008 levels.  I mean, they are speaking of "reducing" (that is, reducing projected increases) spending by not much more than that over 10 years.


Clearly, they are not trying too hard.  This is all kabuki.

snowball777's picture

No, I'm not eating them 'too dry'...they just remind me of when I was a kid and we had to eat them for weeks on end because they were affordable. Never again. ;)

duo's picture

Lima beans, from Lima, Ohio, or Lima, Peru?

DoChenRollingBearing's picture

Peas and beans ARE tastier in Peru than here.

FEDbuster's picture

Soon some will long for the days when they had a choice between peas and beans.  Haitian mud pies may be all that those relying on government support for their existence will have to eat.  Our local food bank is currently "overwhelmed" by the number of families seeking assistance.

grey7beard's picture

>> Haitian mud pies may be all that those relying on government support for their existence will have to eat.

I don't think the military is going to be very happy eating Haitian mud pies.

knowless's picture

then they defect and go to where the money is (drug cartel style?)

BeansBulletsBandaids's picture

Everything's better w/ a little pork added to it - especially in DC.....

Oh regional Indian's picture

Instant classic. 

And I say that as a vegetarian. ;-)


GubbermintWorker's picture

Boil em, mash em, put em in a stew!

Frankie Carbone's picture

Bankers?Puh! Let them eat steak.

macholatte's picture

Can somebody please explain this to me:

If the Fed "owns" $1T+ of "debt", why not just wipe that out? Just take an eraser to the books and be done with it. The Treasury would have been paying interest to itself anyway.

Who gets hurt?

Manthong's picture

My guess is that those reserves have somehow been synthesized, securitized, collateralized, pledged, loaned, leased, insured, reinsured, swapped, conduited, shafted, chopped, chromed and toasted eight ways to Sunday and some other multi-mega-trillion dollar world of hurt is held hostage to the flow that paper represents.

I dunno, is that thinking off in left field?

Oh regional Indian's picture

Actually it's much worse manthong and left field is a vast endless space chock full of "revelations"!


Goatboy's picture

I checked out of curiosity and spent 2 hours reading as hypnotised.


Oh regional Indian's picture

GoatB, you have no idea how multi-contextually nice it was for me to read what yuo wrote. Thanks.


sitenine's picture

Moral hazard.

Isn't humanity a bitch?

dogbreath's picture



he doesn't include the psychos' amonst us who will want to run the show no matter what you call it.

JW n FL's picture

he exactly comments on those who are separated from their natural actions.

JW n FL's picture

more gold! I agree.. dont forget silver.. it purifies dirty water.. clean water is a great thing to have, regardless of what else is going on! whats clean drinkable water worth?

tyler's picture

Ask some people from Africa, I'm pretty sure clean water is priceless.

AldousHuxley's picture

Basically that's a suicide for the Fed.


JW n FL's picture

How about a "Suicide by FED"?

We ALL are offing ourselves!

Anonymouse's picture

Ignoring the who Ponzi issue for the moment, the USTs and other Fed assets support the dollar.  If the debts were canceled, there would be less supporting the dollar, and the implication is that it would be done again.  Monetize debt (not that the Fed would EVER do that) then cancel it --> more and more currency backed by fewer and fewer assets

Dr. No's picture

The fed is separate from the treasury. Whats in itfor the fed to forgive the debt??

cranky-old-geezer's picture

If the Fed "owns" $1T+ of "debt", why not just wipe that out?

Erasing debt (forgiving debt) is THE cardinal sin among bankers. 

Debt is how bankers make money.  You might say debt is the product bankers offer to the public.  

Erasing debt off their books (forgiving debt, writing debt off) is like GM giving cars away, or Coka-Cola giving Coke away, or some other company giving their products away. 

Its like you working for free, giving your labor away.   Would you do that?

Granted, it doesn't cost bankers anything to produce their product.  Money they lend out is created out of thin air. Bankers have no cost basis in their product.  Interest they earn on debt is pure profit.

Yes bankers have overhead expenses.  But there's no cost-of-sales. Gross profit on debt is 100%.

If the Fed forgave the 1 trillion or so debt owed by the US Treasury, it wouldn't solve the real problem.  The US government would continue borrowing and spending like a drunken sailor. 

If the Fed forgave the 1 trillion or so debt owed by the US Treasury, it would set a dangerous precedent.  The US government would expect the Fed to continue forgiving debt.

If the Fed forgave the 1 trillion or so debt owed by the US Treasury, it would set a clear hyperinflationary trend.  There's no way that money created out of thin air and loaned to the government could ever be clawed back and taken out of the money supply.

If the Fed forgave the 1 trillion or so debt owed by the US Treasury, it would create fear and panic among other holders of US Treasury debt.  They would fear the US government might simply choose to not pay back the debt they hold

...which would cause the value of US Treasury debt to collapse overnight

...which would make banks around the world holding large amounts of US Treasury debt  insolvent overnight

...which would precipitate a crash of the banking system worldwide

...which would precipitate a crash of the financial system worldwide.

It would also cause the US dollar to crash and lose its world reserve currency status overnight

...which would cause the US government to collapse overnight

...which would cause the Fed to collapse overnight.

So no, The Fed isn't going to write off one dollar of US Treasury debt.  No fucking way.

Actually the US dollar collapsing, and the US government collapsing, and the Fed collapsing, would be the REAL solution to America's problems.  All of them. 

Just wanted to mention that.

mophead's picture

There are a lot of reasons why the debt can't be forgiven. The real reason is IMO is a currency collapse. All debts are being forgiven, btw... through inflation.

j0nx's picture

Sheeeit. Is your paycheck getting bigger? Mine sure as shit isn't and hasn't for 3+ years. We are NOT experiencing inflation right now and won't be for the indefinite future. We are experiencing biflation on our way to hyper-biflation. The things you need (gas, food, ammo, PM, other commodities) are going wayyy up in price and the things you own or don't really need are going down in value. Your paycheck is dropping or is remaining flat if you are lucky. Kinda hard to have your debt burden become easier when your paycheck is stagnant and your expenses are going up 20% a year....

Nope, we get the WORST possible outcome imo mostly due to globalization. Globalization makes it impossible for the effects of inflation to filter down into your paycheck when some little guy in China or India will do your job for 1/3 the wage or less.

Dr Zaius's picture

I remember when we used to say some guy in China or India will do your job for 1/10 your wage or less. I guess we are getting to parity faster than we think.

cossack55's picture

Please forgive repeats but this is still germane at 0:57.

FEDbuster's picture

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
- Napoleon Bonaparte, 1815

Same old shit, different century.

JW n FL's picture


A History of Money and Banking in the United States (Part 1, 2/4) by Murray N. Rothbard

moronsreign's picture

Sounds like just what we need. Push the reset button,endure the consequence for some undetermined period and start over. Beats a shooting revolution or war which we will get as things are going now.

mr. mirbach's picture

What would occur if CONgress revoked the FED's Charter? Could we "erase" the debt then?


piceridu's picture

It's about Balance Sheets! Every dollar that comes into the system comes in as an asset to the Banks and a Liability to the's just that simple. The Private Capital Holders need their continuous pound of flesh from the people...ROC cancelling debt is out of the question.

straightershooter's picture

Say, your mom (the Fed) borrows a million from you to loan it to your faineant elder brother (the Treasury). So far, so good. Your mom owns an asset ( from your elder brother) and owes a liability to you. Still with me?

Now, you are proposing that since it all happens in the family, why not wipe it all out?

Nobody get hurts, right?

straightershooter's picture

Say, your mom (the Fed) borrows a million from you to loan it to your faineant elder brother (the Treasury). So far, so good. Your mom owns an asset ( from your elder brother) and owes a liability to you. Still with me?

Now, you are proposing that since it all happens in the family, why not wipe it all out? N

Nobody get hurts, right?

FunkyMonkeyBoy's picture

Austerity in America is not going supersize on those fries and only have the basic cable package.

NuckingFuts's picture

+1, or having a phone that only makes phone calls.  OH THE HUMANITY!!!!

Oh regional Indian's picture

+2 for you and Funkymonkey above.


grey7beard's picture

>> Austerity in America

Sounds good, but unfortunaly the folks in the center of the austerity target are the least well off.  There are plenty of seniors just barely getting by.  Don't forget, those are also the folks who have been the most hurt by the zero interes rate policies of the Fed.  If they were to target the gluttonous consumption segment of America, I'd not protest, but celebrate a needed adjustment to attitude. 

SwingForce's picture

"Which is why, more than anything, nobody in DC can possibly demonstrate the political will, which also equates to immediate career suicide, to do the right thing - in this case just say no to more debt - as it would mean one thing and one thing only: putting the fate of their country over and above their own career prospects.

And as is well known, no career politician has ever cared enough about their country enough to actually see their own future as merely secondary to that of the United States."


Truer words were never written, thank the very patriotic Zero-Hedge to print them. Thank you.