Observations On The Latest Debt "Inflection Point", And Why Bernanke Has At Most 5 Months In Which To Announce QE3

Tyler Durden's picture

Yesterday on Tom Keene's always informative show, two of the world's most important economists, Goldman's Jan Hatzius and BofA's Ethan Harris presented their respective defenses for why GDP in 2011 would rise by nearly 4% as per their recent predictions. The straw man for the upside case: recently adopted fiscal stimuli which, however as David Rosenberg notes, are not really stimuli as much as lack of governmental disstimuli. Yet what is interesting is that both ceded that both employment and housing, the two key traditional drivers of economic growth and prosperity, would likely continue deteriorating, with employment ending the year over 9%. In other words, all growth in 2011 will be predicated upon very much more of the same: transfer payments and government stimulus (not to mention inventory accumulation) especially in the form of incremental debt to offset consumer deleveraging. No surprise there. After all the only reason why the economists of the world have expressed an unprecedented amount of bullishness in recent months is that the US is currently experiencing a rare confluence of both fiscal and monetary stimulus: an even that last occurred in March of 2009. The issue is that as we have noted previously, the benefit from the fiscal stimulus has already been negated by the jump in oil and other commodity prices, whereby the token weekly paycheck increase has been more than offset by gas price increases, while the monetary stimulus is already priced in, and absent rumors of another episode of QE in advance of the June end of QE2, the temporary stock market strength will quickly turn into weakness. Which leaves us with the hangover effect of federal deficit... and its funding. The chart below presents some interesting observations in this regard, and also makes us wonder just what will happen to risk assets if Bernanke does not leak the announcement of QE3 by May at the very latest.

Looking at deficit and debt issuance on an LTM basis, we may have reached another inflection point. While the trailing 12 month deficit jumped, and has stayed, over $1 trillion since March 2009, it had at least stayed relatively flat on an LTM basis. As of the November data, however, the LTM trendline has hit a support level and has bounced up. It is very likely that with the need to fund the payroll tax cut this trend will continue deteriorating. In fact, we expect that by the end of 2011 the LTM deficit to be right back at $1.5 trillion. And the other notable inflection: over the past quarter, the debt issuance over the deficit, which had averaged roughly $300 billion on TTM basis, jumped to approximately half a trillion. This is precisely the key part of the double whammy of the "negative convexity" of debt issuance used to fund deficit payments. As for the second one: once rates start picking up, and incremental debt issued by the US starts pricing with a higher cash coupon, increasingly more debt will have to be issued to fund merely the interest expense.

Nearly a year ago, we conducted a sensitivity analysis looking at what the annual interest expense would be as a function of treasury receipts. We concluded that should the average interest rate on US debt rise to 5%, the annual interest payment on the debt would jump from roughly $180 million to almost half a trillion, or roughly 25% of all revenues, at which point the Weimar scenario starts getting quite realistic. Needless to say we will update this analysis shortly, especially now that rates are not only rising, but projected to go up to 4.5% or higher, courtesy of the abovementioned "economic improvement."

But back to the chart: now that we have already managed to extract the benefits from the front-loaded benefits package, all that remains is the cost. And the cost in question is debt issuance risk. Which simply means that like last year, when well over $2 trillion in debt demand was unaccounted for, and subsequently satisfied by QE Lite and QE2, in 2011, when we predict net debt supply will hit another all time record, Ben Bernanke will have no choice but to enter the Treasury purchasing market once again. In other words, we expect that Jon Hilsenrath will circulate an article highlighting the ever greater likelihood of another round of quantitative easing some time in April... just a few weeks after the most recent debt ceiling vote passes, this time allowing the US Treasury to issue up to $15.5 trillion in debt, or $1.2 trillion more than the current token limit- just enough to kick the can one more year down the road.

On the other hand, if we are wrong, and if Ron Paul somehow succeeds in preventing this form occurring, then all those market "strategists" who expound the benefits of the economic "recovery" when all they expect are further rounds of QE, will promptly change their tune.

In other words, the entire fate of the market's 2011 closing print will depend on that critical window between April and May when QE3 may or may not be announced.

Below we present the Hatzius-Harris interview with Tom Keene.


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winks's picture

Notice how Bernanke says he may do "more or less" of QE2 "as needed". In other words, it is open ended. There will be no QE3 - he knows it won't fly. Much easier to use what is already in place and dial it up or down based on circumstances.

Quixotic_Not's picture

You really think that "There will be no QE3"?

IMHO that would require an aknowledgement from Bernank that *Keynesian Economics* has failed, as that *IS* his last play from that game book...

The only way to stop Bernank is to take away his ability to *pump* the failed system with QE drugs, when it approaches flatline...that is to *End the Fed* of remove the Bernank from his pseudo .GOV position.

Bankster Gangsters are doing their damnest to tread water using a *failed* model and MUST loot the Global Economy *until* Ponzi *debt* creation collapses and *stacked* gaming theory ceases to trick - Then, and only THEN, will the *sovereign* emperors be *finally* denounced as the craven and depraved inglorious basturds they *always* were.

Squeezing the last bit of ill-gotten profit has become a desperate addiction for the  perp skool bandits, and led by their King Ponzi Monkey, Ben the Bernank, they have *successfully* looted the U$ Treasury in broad daylight....

At some point *GAME OVER*, and The 'MeriKan Sheeple will become fully spooked upon realization that Pastures of Ignorant Bliss shall never 'gain be grazed upon, and they'll realize they missed da boat to self-actualization through duplicity, graft and brazent *taking*, having been upstaged by the Bankster Gangsters and their politikal lap-pets, the (D) & (R) Kleptocrats.

Until liquidity via amassing generational debt slavery stops working, the games will continue!

jbc77's picture

I think the previous post may be on to something. Thing about how the main stream media really picked up on QE2. Glenn Beck covered it, 60 minutes interview. The average person is starting to understand whats going on here. At some point something has to give. No one with half a brain expects this to end well. I think at some point people will push back, it may take $5 / $6 gas, but eventually the jig is up. The fed is in a field of landmines and the world only needs to step on one and they all go off.

Perseid.Rocks's picture

*Keynesian Economics*

Malthusian Economics will be the new phrase for 2011.. the economics of violating ones neighbor while rushing for the door.

Dave's picture

You ever been on the Gulf coast right before the hurrucane came in?

Youri Carma's picture

Indeedy "Open Ended" and

FED’s QEII is $1 trillion or more and NOT "only" the $600 billion

MarketWatch: "The U.S. central bank’s already buying intermediate-term Treasury bonds as it recycles cash from its maturing mortgage holdings. Those purchases could total nearly $490 billion in the next 12 months, according to the report prepared by a Nomura team led by George Goncalves, head of U.S. rates strategy."

So $600 + $490= 1.09 Trill

The Financial Times: "Aside from the $600bn of Treasuries slated for purchase under “QE2” until the end of next June, the Fed will also buy an estimated $300bn of additional Treasuries – from reinvesting the proceeds of expiring mortgages. That is expected to push total purchases to about $900bn."

So $600 + $300= 0.9 Trill

Fed may circle back to mortgage-backed securities, 1 November 2010, (MarketWatch) http://www.marketwatch.com/story/fed-may-turn-to-mortgage-backed-securities-2010-11-01

NY Fed outlines plan for ‘QE2’ buying, 9 November 2010, by Michael Mackenzie in New York (The Financial times) http://www.ft.com/cms/s/0/9b83261e-ec3d-11df-9e11-00144feab49a.html

MarketTruth's picture

Maybe the Fed will lateral QE in mid-2011 into for a new program called ??? that outright purchases muni bonds? We all know muni bonds is a big fail and getting larger and far worse by the passing week.

??'s picture

not to mention that the administration will almost surely facilitate the repatriation of offshore profits (estimated to total almost $2t (coincidentally the same as their current cash hoard) at a tax rate in the  5% range.  This will almost certainly flow into stock buybacks and special dividends driving equities even higher and screwing the taxpayer that much more.

KickIce's picture

I seriously doubt there's any more announcements for QE, they will keep Ben off the idiot box and but he will continue to print money.  QE2 to infinity.


buzzsaw99's picture

Ben Bernanke will have no choice but to enter the Treasury purchasing market once again...

I'm absolutely banking on it. This is a solid actionable fact. zirp 4evah, qe infinity.

living on the edge's picture

I think you're right, Bernanke will never stop. By the way I like your pun "I'm absolutely banking on it".

Dr o love's picture

All Bernanke has to do is orchestrate a 3% drop in the S&P and warn of impending Armageddon to get our gutless Congress to look the other way while he initiates QE 3, QE 4, QE 5, etc...

Eternal Student's picture

I would agree. Though I think that the other observations about him not actually calling it QE3 are valid.

What exactly are his options here? To stop printing? I don't think he's got the guts for it. My impression is that he's boxed in, with no other way out (in his mind).


living on the edge's picture

We will never know the real price tag of QE2. You can bet they will never stop because once they do it is game over. They can call it whatever they want but they won't be successful. 

KickIce's picture

No doubt he's going to shoot his eye out.

Cursive's picture


I triple dog dare the bernank to let rates rise:

Bond vigilantes >>>>>>>>> The Ben Bernank

Caviar Emptor's picture

It will all boil down to a question of urgency and political expediency (as always). If jobs growth sputters and housing continues to double dip there'll be no hesitation about QE3 (though publicly they'll wring their hands about debt and it's the very last time we'll need to do it and we promise that we'll get austere some day). In a stressed economy, the Fed is more likely to respond to anxieties and unpredictables because the stakes keep getting higher and higher, the clock keeps ticking, and consequences of being 'wrong' keep increasing. 

My prediction: in 2011, price and capital controls will come to the foreground, slowly at first through policy shifts like position limits and disclosures and margin requirements, then through tax incentives.

Id fight Gandhi's picture

No, they're bound to freak out about commodity prices especially oil when it hits 100.

The country jst cant run on that. QE will have to end.

Caviar Emptor's picture

They can"t end QE. GDP would go negative. But they can impose price controls. And will.

Rogerwilco's picture

If they're dumb enough to try price controls, then they had better institute wage controls as well. Unless wages are forced higher, Obama will face outbreaks of violence and things will start to blow up, literally. They really should consider hiring some experts from the PRC at this point. The Chinese government has far more experience in keeping the lid on when things get rough.

Caviar Emptor's picture

We had price (and wage) controls here in the US in the early 70s for 4 years. THis time you won't need wage controls with 9% unemployment and outsourcing

Rogerwilco's picture

I remember Nixon's attempts vey well. My point is that price controls alone will not quell the anger, especially when the shortages start and people are faced with long lines and empty store shelves. Obama will have to force wages higher and/or increase handouts so there is some appearance of progress. If we are going to model our economy after the Chinese, then we had better learn to govern like them.

KickIce's picture

That would be the end goal.  Valerie Jarrett has stated publicly that she admires Mao.  You don't put admitted communists like Van Jones in position of power without an end game that will transform government.

Terminus C's picture

Mao made Stalin look like a cabbage patch doll when it came to killing his own people.  For one to say that they "admired" someone like that... wow.


TruthInSunshine's picture

I don't know how many people Mao killed, but Stalin is reported to have killed a minimum of 50 million Russians during his time in power.

Sean7k's picture

Your better geography studies place the numbers between 18 and 35 million. Horrific by any standards, if Mao was worse, then he might start getting into numbers killed by US governments in their attempts to spread democracy via poisoned foodstuffs, military takeovers for raw materials and of course, oil. 

Incredibly, people continue to classify America as a great model- you might notice, very few are from countries outside of the US and Britain- another mass killer in it's days as a world power.

I find it interesting how throughout history, one person has been capable of killing so many people and the population rarely objects. Even when the people are themselves. I find it even more interesting that we continue to use any form of government based on the rule of a small elite buttressed by a police power and legitimized by an in house judicial system.

New_Meat's picture

Sean-happy new year. 

" numbers killed by US governments..."

references please?


Sean7k's picture

Happy New Year Ned,

Spanish- American War, The Depression, Vietnam, Both Gulf Wars, Grenada, Nicaragua, Panama. Use of the IMF to transfer the wealth of nations through projects creating poverty and death through the accumulation of debt. Baby formulas and other tainted food items that cannot be sold here, being sent to foreign countries. The use of revolutionaries to access products in Africa and South America. 

The use of corn based foods to cause obesity, diabetes and cancer. The pollution of water, air and soils creating cancers and other diseases- ending lives prematurely. The US government not only allowed these things to happen, they wrote the laws that allowed it.

Economic Hitmen, Us History, History of Money and Banking Murray Rothbard, Acres Magazine- hundreds of articles, Organic Chemistry, The Robber Barons, The Morgans, that will have to do for a start. 


hrrreardon's picture

The people who did these things are the same people regardless of their nationality. It's got nothing to do with America vs. China vs. Russia vs. Great Brittain. Countries are merely ideas brought to reality by the people's vision which waxes and wanes like the phases of the moon. This is a human problem. Go easy on America. She was (and still is) a good idea in need of a people worthy of her. She needs your actions,, not your reactions.

Dave's picture

Anyone who admires Mao Tse Tung either doesn't know shit about

him or is a sick puppy. Mao is high up in a very elite group of psycos.

TruthInSunshine's picture

9% unemployment?

Brother, I've seen your posts, and you're far too intelligent for that trash.

Is there a legitimate thinker on ZH or anywhere who has no doubt the real unemployment rate under a U6 type measure would easily exceed 13%, and that the true unemployment rate not using any current or former governmentally crafted smoke&mirrors statistics scheme is closer to 20% (and possibly higher)?

New_Meat's picture

conveyor belt no. U-6 is engaged, and voila! the answer is whatever they dial it to be.

Confuchius's picture

You've probably figured out that oil has not changed price. In Gold.

Had the bernank not run the printing presses 24/7 oil would still be $60 or so.

If the printing continues (he's trapped) oil will get to $200/$500/$1000.


Happy New Year!

CrashisOptimistic's picture

Here is the debt outstanding:


Here is the interest on it:



It says $414 billion on $13.8 trillion.

That's an average rate of 3%.


We concluded that should the average interest rate on US debt rise to 5%, the annual interest payment on the debt would jump from roughly $180 million to almost half a trillion, or roughly 25% of all revenues, at which point the Weimar scenario starts getting quite realistic. 


I do not understand these numbers.  The annual interest payment is ALREADY almost half a trillion -- at 3%.

An increase to 5% would be a 60% increase to 414B X 1.6 = 662B.

makeyoumiss's picture

QE3, 4, 5 with no end. QE is the new normal.

topcallingtroll's picture

I sure hope that socialist, Kenyan, anti-colonialist-business-hater allows all that foreign held money to come back to the USA tax free.  He has dug in his heels on that one.  It really sticks in his craw to consider allowing money to come back to the USA tax free because he knows that that money will be distributed to capital owners rather than his base of tax sucking parasites.  It's so "unfair" according to  the great redistributor in chief.

Id fight Gandhi's picture

You're wrong about the business hater. If big business is so wonderful why do you need bailouts and government takeovers? Whatever happened to the best company will prevail?

We lost our soul and went to fascism, big business style in 2008.

KickIce's picture

We have been fighting an uphill battle since LBJs "Great Society" act and our politicians have been gaming the system ever since.  Obama just stands ready to complete the transition to a new type of government, a position he has been groomed for.

Pants McPants's picture

I'd argue we sold our soul in the 1913, then sealed our fate in the 1930's when fascism became the rage the world over.  Mussolini, Uncle Joe, Hitler, and Roosevelt all had the same idea (controllers?).

KickIce's picture

Hard to argue with that.  My point was more from a financial standpoint.  Unconstitutional as it was, SS was financially solvent at the onset.  In the spirit of vote buying, future politicians couldn't just leave it alone.

Dave's picture

Groomed by whom? His election was pure luck and stupidity by the

opposition. TPTB see an opportunity and are making the most of it.

That's politics American style. Now the economic situation is a whole

nuther deal. I believe Alan Greenspan set it up on purpose

to crash the fiat system but there's no way he can admit that.

KickIce's picture

Study his life, the guy has been surrounded with more communists than Stalin.  He studies the Constitution not to follow it but to destroy it.

Phat Stax's picture

What about the 3 new Fed committee members rotating on this month?  They are supposed to be QE hawks... I would think they could influence more than just their 3 votes.

TruthInSunshine's picture

I'll go odd man out and say that Bernanke is doomed if/when (take your pick) we get another significant increase, YoY (maybe shorter term than that?) in the price of gasoline, heating oil, produce, etc.

I already see people who wouldn't have been able to tell me who Ben Bernanke was a year ago refer to him in casual conversation (this is the reason he and his handlers in this administration have felt compelled to have Bernanke go on '60 Minutes' so often - why else would he do this?), and with Republicans set to take over the HofR, there will be more fanning of the flames and blame game politics to incite the American Middle Class on who is to blame for such inflation, even if the Republicans don't really care about the matter - or worse yet, would have done/supported the same things Bernanke is doing now but if under a GOP Executive Branch.

In other words, all is fair in Love, War & Politics, and I expect to see fireworks this year with Bernanke cast as a central villain if things continue to evolve (devolve?) as they have been.

Now, let me put on my tin hat, and also say that the very sophisticated people running the Federal Reserve see the problems they face on the horizon, and know that they can't please the kleptocracy while fooling the middle class on a longer horizon, and they already have their backup or contigency plan in place. What that contingency plan is, whether a theatric Bernanke-as-sacrificial-lamb before Ron Paul, or some other measure, is anyone's guess, but the succession plan is already in place.

serotonindumptruck's picture

 "...they already have their backup or contingency plan in place."

Yes, they do. It's known as "Continuity of Government", and it likely involves the elite and their families being rapidly relocated to vast underground complexes such as Cheyenne Mountain in Colorado.

Perhaps this might be why Caterpillar has enjoyed such a successful business model during the "recession". The heavy mining and earth-moving equipment may be very much applicable to the construction of large subterrainian evacuation/living facilities.


Chappaquiddick's picture

The debt that the Fed now holds - is there a rebate back to Government on this $1Tr+ debt mountain, so that the effective rate for this debt is zero? 

New_Meat's picture

Dick: You have hit The Bernank's viewpoint, imho.  He knows that debt is vanishing and is using e-press to make magic ONES with many magic ZEROS to fill the void.  As a kid he must have been fascinated by magic, because the exact time he needs to, he thinks he can make them all vanish.

- Ned

and OT but fits your handle: