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.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Caviar Emptor's picture

The Fed's only option to respond to Biflation (according to their playbook): QE3 with price controls. 

Bubbles...bubbles everywhere's picture

"so...we expect oil to hit triple digits and it's going to be a drag on growth". Really, just a "drag", eh? What exactly would be the efect of a $10 rise of oil in GDP and disposable income again? Add to the 5% drop in housing values, the rising unemployment due to municipal government cuts and there is no way to avoid a continuation of QE2 or a derivative by any other name.

CrashisOptimistic's picture

Pasting my comments from the other thread:

They threw in a crude price number because it can no longer be ignored, but I am curious about the sophisitication of the model of its effect on all the other parameters.

The US imported about 12 million barrels of oil per day in 2010.  US oil production peaked several decades ago so domestic production won't reduce that.

The point is this.  If GS calls for a $10/barrel increase, a decrease in unemployment (more commuters) and overall GDP growth (even more oil consumption) then with just a 1% consumption increase we have 12.1 mbpd consumption in 2011 X $10 =

121 million dollars/day MORE sent elsewhere or $3.6 billion MORE (than 2010) per month drained from the US economy.  

This is not a huge number, but it is a substantial number.  One wonders if it's in their model.  For six months it is $21.8 billion.  They call for an additional $10/barrel increase by EOY so that will be an additional $21.8 billion for a year's total of 

$21.8B + $43.6B or $65 billion dollars additional vs 2010 drained from the US in 2011 if the price hits those 6 month targets early in the 6 month segments.

The overall drain, of course, is $100 X 12.1 mbpd.  $442 billion/yr.


And then:


Replying to myself in a curiosity tidbit.

To what extent will a $20 increase in crude prices wipe out the 2% decrease in Social Security taxes?

Avg American income $34,000ish/yr.  Times 2% = $680.  US total of employed workers: 

239 million

So 239million people X $680/person = $162 billion.

So an oil price increase of $20 will wipe out 40% of the 2% SS stimulus.

Note that the 34K number is influenced by a big chunk of workforce earning beyond the $SS contrib cap.  Note also that a significant chunk of the workforce (state govt teacher types etc) do not pay into Soc Sec.  So the 40% number is likely quite a bit low.

IOW, a $20 crude jack could negate most or all of the 2% stimulus.  I wonder if these models have that in them.

Bubbles...bubbles everywhere's picture

Thank you for crushing the numbers. I think they are benign, since rising oil per gallon would also translate into higher transportation and food prices, on top of already surging commodities.

cxl9's picture

US total of employed workers: 

239 million

So 239million people X $680/person = $162 billion.

Some good number crunching overall, but your 239MM workers is off. Labor participation rate is 64.5% which is 154MM (Nov. 2010). See BLS A-1.

CrashisOptimistic's picture

You are correct.  I extracted from that spreadsheet the incorrect number.  239 M is the overall civilian pop, not the employed pop, which is apparently, from that same spreadsheet, 139 M.

This is a crushing mistake on my part and it changes the conclusion.

The 2% SS cut on just that many people is $680 X 139M = $94.5 billion for the year.

Oil's $20 jack will destroy 2/3 of this cut (stimulus).

It seems very unlikely GS has this in their model, unless they are pretending the portion of outflow going to Canada and Mexico for their oil will buy US goods exported to those countries.

IslandMan's picture


239 is not the "overall civilian population", whatever that means (?).  The US pop is about 300 million ; 239 may be the number of people over 18 years old, or 18-64, or some other such category. 

CrashisOptimistic's picture

Yes, it is listed a non institutional civilian pop, and probably that age group.  I didn't type it all out because all that is relevant to the calculation was the number employed.

max2205's picture

Great so now I have to borrow more money to invest When Ben announces QE 2. Ok

Sean7k's picture

There are so many ways for this to blow up. The only option is QE and lots of it. The debt swap facility will be used and abused- covering problems in Japan and Europe. The attempt at a global soft landing using the Asian economies will fail.

Why? People get angry when their money continues to lose value. While the smart investors will shield their wealth, the costs to the poor and middle class will continue to impoverish. When entitlements fail to cover the basics and the seizures of capital begin along with new fees and local taxation schemes- people will get angry. 

There is not an election to burn off the heat. 

As consumption declines, businesses will fail. Unemployment will rise. They will have to accelerate the printing of money to maintain any liquidity. Unfortunately, the liquidity is being directed by the banksters and they will direct it into their pockets through off shore accounts and other protections. 

At some point, the FED will present the bill for all the trillions in off sheet garbage and attempt to dump it on the taxpayer. I don't see a riot or a revolution. I see people saying no mas and refusing to pay. Then, it gets interesting...

TruthInSunshine's picture

That literally harkens back to Gonzo Lira's outstanding article he wrote some time ago, where he identified two fictional upper-middle class retirees (or near retirees), who opt out of compliance with the system, tax wise and otherwise, emphasizing that the real problems begin with a quiet revolution when upstanding members of the middle class and upper middle class start engaging in acts of non-compliance.

At that point, the whole system has to inevitably collapse.

It was one of my favorite articles posted on Zero Hedge or anywhere else in 2010.

lunaticfringe's picture

No shit. That was my very aha moment when Craig T Nelson said he wasn't going to pay taxes on Beck's show. The clip is still on you tube but I'm too lazy to find it.

The SHTF when gas hits 5 bucks and the southern boys don't have enough money to buy beer. Thats when the trailer house blows apart.


KickIce's picture

Yeah, I'd say that beer qualifies as a commodity in the south.

Sean7k's picture

One of Gonzo's better pieces. When the leadership continues to rape the law, the common people line up for the train.

They think they have enough police power to control it. They couldn't control three cities in Iraq. The Afgani's are kicking their butts. Many of those unemployed are ex-soldiers.

Nothing here to feel smug about. 

blindman's picture

so, i drink some wine after purchasing rat poison on the first day

of the new year, after hearing report from my visiting daughter that

something in the garage was no doubt a rat! and so the laundry room

is uninhabitable and then i watch this clip of jan and keene and harris

and i'm thinking what is it about public financial rape and financial execution

that turns these guys on?  then i remember it is a way of life.  a means

to an end that is globalisation so all acts of forced copulation are justified.

or / and what are the moral markers that are set when a mathematic rapist

assaults a consumption nymphomaniac while being digitally recorded and

broadcast globally. ?  there, my prediction for 2011. 

but what are the ramifications of a system that defiles itself while

feeding on its neighbor?  or itself?  we will see in 2011.

DaBernank's picture

QE3 will have some Orwellian name... "Deflation Stability", "Asset Value Protection" ... any good ideas?

But whatever it's called, TD is right that it will include the purchase of Muni Debt.

MobBarley's picture

How about 'Debt Mitigation'


It's in your face enough to work in NY State.


lunaticfringe's picture

QE2 will simply continue. The Bernank has already foreshadowed that event. If the hairsplitters wanna say that QE2 ended at 600 nillion and QE3 starts at 601...I'm cool with that.

They have a status quo mess on their hands. And if I was the generation born after '64...I'd be sharpening the guillotines.

High Plains Drifter's picture

As a metal head, I can say without a doubt that the Bernank is going to muck it up more than he already has and for this I thank him and my PM holdings thank him , very much.

KickIce's picture

I think the next ZH poll should be who's mug shot will grace the $1,000.00 dollar bill.  (Yes, I realize this could not happen as it would be the ultimate concession that we are printing money)

mhjhnsn's picture

imho, the external, "real" economy will just be the excuse for continuing QE... however well or poorly it is doing, the Fed will claim it's not good enough and could be improved with more QE... because that's the only chance to keep financing the exploding federal gov deficit at any kind of affordable rates.  The world probably lost its appetite for USG debt in the amounts being sold, sometime in the last 12 months, and QE is what is keeping interest rates from spiking.  So much for Fed independence, btb...

If you believe the current deficits are what is keeping us out of depression, there is no obvious alternative course of action that is politically feasible.  Myself, I have my doubts whether the deficits are nearly as stimulative as the Washington crowd seems to think, and the whole thing is unsustainable beyond another year or two, three at the outside, in any case.  And the deficits are mostly funding payoffs to interest groups of various kinds, not legit "stimulus" by any rational standard.

So, we can either start to reel in the deficits and the associated QE in 2011, or just keep spending $1.5T more than we have every year while monetizing all that debt with QE, and wait for the crash.

bankonzhongguo's picture

The first red flag for 2011 is the congressional debt ceiling vote with the "new" congress.  Will this be conservative - meaning single year increase or will it be enough to carry the country through the 2012 election - debt ceiling raised to $25 trillion?  Will it be a single issue vote, or the newer era's critical legislation gang bang where everyone gets their earmarks passed with the ceiling. 

I think it will be a massive debt ceiling so that nobody has to vote on it again until the next election. 

The end game is just a merry go round of corporate feeding upon the carcass that once was America.  Every sector will get their quarterly turn at the victim.  One quarter its energy, then food, then interest rates.  The UST must go to over 5% for the banks to own America and Americans.  When the water runs with this much blood, you can only have a vampire orgy feeding frenzy. 

Protect your children.

lunaticfringe's picture

Ya wanna know what has staved off the pain short term? The government. Three years worth of unemployment checks and they still haven't figured out we have lost 20 million jobs yet? When is that fucking insanity going to end. If the government admitted we have a structural problem that there is no solution for- they'd have to end eternal largesses payments. When that shit happens. Hold on. That cannot go on forever either.

MobBarley's picture

Two choices:

Eternal unemployment payments ('the dole') 


FEMA camps.

I'm sorry, did I say FEMA camps? Why would those exist. That makes no sense.

Surely it's a conspiracy. 


Quixotic_Not's picture

They're no longer called "FEMA camps".

They will be called Homeland Security Worker Relocation Camps...I remember reading the Congressional Order to the Army back in 1994.

For the uninformed, some of us have seen the *eventual* END-GAMES a *long* time ago:



merehuman's picture

3rd choice...war, to get rid of us useless  eaters .

TruthInSunshine's picture

You wanna know what has staved off the pain short term?


1) Credit cards (take them away and see what happens).

2) Unemployment insurance, electronic welfare debit cards (for food), government subsidies to the poor and working for for heating/electricity assistance, Medicare/Medicaid, Social Security, etc.

3) Millions not making their mortgage payments (I'm not passing a moral judgment one way or the other, but just pointing to fact).

4) Extend and pretend valuation methods extended to banks and, now, government on asset valuations.

Take especially 1 or 2 away, and we'll have a 2nd Revolution and possibly civil war in the U.S.


blindman's picture

qe = stealing.

tarp = stealing.

taldigital representation so f + stealing.

fed + stealing.

voting = stealing ......

life + + = stealing.

random shit _+=+ stealing .....

random digital + symbol 

ism + your attention +  time

and energy + =   

stealing.  and money is + =

just a thought.  and always doomed.

=  attention.  hehe...

so , freedom is your enemy. 

insanity your home.  remember,,,,,,

you are sane,  no matter how odd.  or normal.

happy new


my po

em fo





razorthin's picture

Wouldn't mind a spit and sputter of uncertainty about more QE first though, so we can get a better price on silver.  Would be sweet to get a bit of a deflationary spiral before the big HI.

blindman's picture



SP 500 and NDX March Futures Daily Charts Final for 2010 Jammed the futures higher into the closing fifteen minutes to finish near unchanged.

I would not be surprised to see a correction in January. Last year it occurred about week two.

Wait for it.

razorthin's picture

The price of oil holds sway above all forces.  It breaks out well above $100 without a reduction of the real unemployment rate to below 8%, it's over. NO, the world CAN'T handle $100 oil.

blindman's picture

qe = inflation of speculative commodities.  unemployment is a function,

result, of technologic improvement, advancement, and a source of raping

value and life from labor and capacity and potential from those so

encumbered,  capable,  by those so inclined and unable to satisfy but endowed,

"legally",  to spoil said spoils.

"price" is manufactured, synthetic,  via fraud and sway is derivative extremis,

a force of man, to milk and steal future obligation, promise and commitment,

and deliver said to the headless elite.  ongoing..  seee

the future,  many headless....

IslandMan's picture


The world can handle $100 / barrel oil.

The US cannot.

The US is not the world.

ZeroPower's picture

Considering China and India are responsible for 35,000 new cars on the road, DAILY, i propose to you the world indeed cannot handle $100/oil. 

Although, it will have to learn how.

lynnybee's picture

I just read JIM SINCLAIR, JSMINESET, & you know what he says :   QE to INFINITY .    Now, how can anyone refute the great one, Jim Sinclair ! 

6 String's picture

I'm just going to have to print this f'ing beautifully said piece of logic from my printer...and stick it in front of my computer, stick it on every available surface I know of--for alpha and perhaps even survival, this is almost all that will matter in 2011:

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.  

I simply couldn't not have articulated it better myself. Kudos, ZH. Some serious nail down.

Sudden Debt's picture

4.5 on the bonds would be the killer. Actually, once over 3,48% it's already over and out for the dollar.

Everybodys All American's picture

Without a further round of QE municipals all over the place fail and banks would have alot less "free money" via POMO to boost their false earnings. There is no way we will not see some form of QE 3.

gwar5's picture

I think they'll roll out the QE III plans when they roll out the State and Muni crises this Spring. On Schedule.

Then the EU crises will be rolled out again, ala Spain, to elevate the panic there and make Americans feel a little better.

At that point, they'll start floating the idea of the IMF Bancor WRC, and see if the Chinese and the sheeple are ready for their brew

With compliant media and regulatory agencies, it really just boils down to stage craft on their part, and where they're going

They don't lack hubris so they'll swing for the fences. Our FED is on a one way suicide mission, any higher rates and they're bankrupt

That's why the globalist missionaries from the UN have taken over our government and we should move our gold away from the FRBNY before they hand it to the IMF


Phat Stax's picture

What about the Fed's credibility - what's left of it...?  At some point their self-preservation gene will kick in and that will curtail more QE.  There is a tipping point somewhere - and a threat to the dollar's status as the world's currency could also be it.

Atomizer's picture

Bernanke compilation.

Bernanke in Denial 2005-2007


tom's picture

Oil needs to pass $120 for non-interventionists (wrongly named "hawks") to gain the upper hand on the FOMC. With China tightening and Europe crumbling, I just can't see that happening this year. You can call it QE3 or you can call it an extension of QE2, you're getting it all the same.

Atomizer's picture

Bernanke goes undercover to invigorate Quantitative Sleazing v.3.0


Clapham Junction's picture


Draft for men aged 18-25, to begin mandatory military service.

Stock market goes away completely.

Mission accomplished.

Quixotic_Not's picture

'MeRiKan Sheeple...so dumbed-down-to-sucumb they cheer the destruction of their own prosperity, and that of their progeny.

??'s picture


excellent paper on CO2 and Warming

New paper – “absence of correlation between temperature changes … and CO2″


New_Meat's picture

OT-OT Dude, new concept for all y'all: separation of effects.  Below are conservative (high) data on GHG effects of invisible gas including plant food.  It's on wikipedia, so we know that it is right ;-)

Of course, some like my brothers out west, think that warmer would be better.  And then, there is this crowd:

http://www.minnesotansforglobalwarming.com/m4gw/ them dudes know something about the need for warming. 


(%) Water Vapor H2O 36 – 72 %   Carbon Dioxide CO2 9 – 26 % Methane CH4 4 – 9 %   Ozone O3

3 – 7 %

TexDenim's picture

I believe there will be no QE3. We now have a GOP lower house which will be looking for any issue with which to confront the BO administration and the Fed. Given the debt levels already extant in this economy, I can't imagine that it will be political feasible to launch a third round.