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.
Chart 1: Cumulative US Individual Income tax revenues and debt issuance. Since the failure of Lehman, through November 30, 2010, the US government has issued $3.8 trillion in debt, and collected $3.6 trillion in tax receipts. Uncle Sam continues to fund over 100% of every dollar received from taxes with his own credit card, which is somehow still stuck at an APR of about 2%.
Chart 2: The same as above, but also showing the cumulative differential between the two metrics. We fail to observe any green shoots, or any improvement in the cumulative delta.
Chart 3: While the debt to tax collection metric is deplorable, what is far more scarier, and has very profound implications for future US debt, is that the cumulative debt over deficit differential not only continues to rise, but has hit an all time high. Forgive us if we laugh in the faces of all those who claim that rising tax revenues are a certain indication of economic improvement. Nothing could be further from the truth: the only "improvement" is short-term economic stimulus (with an ever declining half life), purchased on Uncle Sam's credit card. Should the recent acceleration in interest rates higher persist, we expect that very soon the Uncle Sugar APR will no longer be quite as attractive as it has been during this period of drunken sailor borrowing.
And if you are not scared enough by the above figures, here is Bill Buckler of the Privateer fame's condemnation of what anyone with half a brain realizes is pure, unadulterated fiscal lunacy (dictated in no small part by the same people at Goldman who are now in charge of monetary policy as well):
Before fiscal 2008, the US Treasury had only run an official deficit above the $US 400 Billion level once - in 2004. In the three years between 1998 and 2000, the Treasury had even claimed to have run budget SURPLUSES, even thought its debt climbed throughout the period.
- In fiscal 2008 - the official Treasury deficit was $US 438 Billion
- Ten weeks into fiscal 2009 - the Fed cut its controlling rate to 0.00 - 0.25 percent
- In fiscal 2009 - the official Treasury deficit was $US 1.42 TRILLION
- In fiscal 2010 - the official Treasury deficit was $US 1.29 TRILLION
- White House projections for fiscal 2011 are for an official Treasury deficit of $US 1.5 TRILLION
In fiscal 2009 and early fiscal 2010, the Fed directly monetised an official $US 300 Billion of US Treasury debt. Between November 2010 and June 2011, the Fed plans to buy another $US 900 Billion worth. Nobody, including the Fed knows what will happen after that.
When looking at these figures, it is wise to remember that what is being “produced” here is the reserve currency of the world. This is why the US government has gotten away with this borrowing as long as they have. And it is also why the Fed has been able to accommodate them with non-existent official interest rates for as long as they have. But for how much longer?
That is the 64 quadrillion dollar question.