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Size Buyer now a Size Seller
The Social Security Trust Fund released some data today. There are some
data points worth noting, they might lead to a conclusion. But first,
for the history buffs, I want to show you a “Tipping Point”. I
think the exact date was March 3rd or 4th. For sure it was sometime in
March that the SSTF went negative since Greenspan fixed things in 1983.
In March the CBO came up with a forecast for the fiscal year of a $29B
deficit. I look at things on a calendar year basis. My number for the
year 2010 is -$50 billion in cash flow (excludes interest). The
components:
Payroll Tax: $640b
Tax on Income: $24b
Total in: $664b
Benefits: $703b
R.R. Ex.: $5b
Adm: $6b
Total out: $714b
Net Decrease in Cash: $50 billion
The significance of this is that the US Treasury will have to fund this
shortfall. They will have to sell an additional $50b of debt into the
public market. This $50b has nothing to do with what we call the
deficit. This is money we have to borrow in addition to the deficit.
In prior years the SSTF has generated big cash surpluses. This cash was
invested in Treasury securities that had an average life of 8 years and
maturities ranging out to fifteen years. The TF was a great place to
sell bonds. Their big appetite for long duration securities helped fund
our deficits and extend the average life of our debt profile. But not
any longer. That ‘tipping point’ is the first step on the way to a very
steep staircase.
The following chart shows the actual cash surpluses of the TF over the
last decade. The red is my 2010 estimate. I am not far off. Note that
there is a big swing from the average from 2000-2008 (+$70b) and 2010
(-$50b). That difference comes to $120b. So at this nexus point a
traditional “size buyer” is morphed into a “size seller”. This is not
going to change. The net negative number will likely improve a bit in
2011 and 2012, after that the cash outflow will rise every year.
There is a very big debate on the future of interest rates. David
Rosenberg sees deflation and a future credit market that looks like
Japan’s for the past 20 years. Call that “Long Term Zirp” or “LTZ”. On
the other extreme would be Jim Grant. His thinking is, “Sell Bonds Now”
or “SBN”. Goldman Sachs is more in the camp of LTZ while Morgan Stanley
has put its neck out with SBN.
There are dozens of very smart thinkers who are lining up on either side
of this big fence. Therefore someone is going to be wrong and there is
some big money to be made if you choose the right door. I can’t decide.
The arguments on both sides are compelling.
The critical variable may come down to good old supply and demand. Just
who is it that is going to be buying all this stuff that is coming down
the pike. It will not be the SSTF. They are size sellers for a long time
to come. It is my belief that there will be a cash flow shortfall for
all of the other categories that make up the Intergovernmental Account
“IG”. This means that the current holders of one third of all our debts
will not only be on a buyers strike, but the IG Account may be cashing
in $100b of chips a year.
I don’t see China, Russia, Hong Kong, UK, EU or OPEC increasing their
holdings to accommodate the supply. There is not enough domestic demand
either. The only scenario that I see that could work is if we have
perpetual financial chaos outside our border that sucks money in because
of the lack of alternative, and there is no increase in demand
for credit in the real economy. Let’s just hope that is not the outcome.
One wild card would be for the US banks to become the "reverse lender of
last resort". They would buy and hold the $4-5 Trillion of excess
supply that is coming. Their balance sheets would explode. I am not
aware of any economy that has worked (for long) where the private sector
banks used their ability to multiply money by lending it to the
provider of the credit (Treasury borrows from banks/Federal Reserve
lends to banks through Repo window). Again, let’s hope that will not
happen. That is Argentina.
When you are trying to sell a deal on Wall Street you go to a list of
names and get “circles”. When you get enough circles you have a deal and
drink champagne. If you don’t get enough you either revise the deal or
just let it die. I would like to see those ‘circles’ for $5 Trillion of
US paper over the next five years. All the names are there; we will not
invent any new ones. What is the Pro-Forma ownership in 2015? I, for
one, do not see a plausible result. Absent those circles I have to be in
the SBN crowd.
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Given the amount of private debt that will be written off over the next few years, there will be a lot of room for the Fed to monetize federal debt without inflation. Given the Feds mandate to insure steady prices, which they interpret as inflation of about 2%, the Fed is essentially mandated to monetize the Federal debt as that will be the only way to pump money into the system and prevent deflation. This process will go on for quite awhile. Keep in mind, the US doesn't have to have its act together in absolute terms only relative terms compared to the rest of the world. Be prepared to be amazed at how large the Feds balance sheet can get.
That's nothing, just think about the Fed's MBS portfolio in the same context...
Only way out for the US is to increase taxes to pay for all those entitlements. Either that, or cut benefits, placing millions in the poverty line.
+1 leo
i have to add - maybe it's your pension-watcher's bias, but your phrasing implies that increasing taxes won't place millions in the poverty line...
i don't believe these options are mutually exclusive.
I'm not for increasing taxes but the truth is cutting benefits will disproportionately hurt older Americans who are getting next to nothing on their savings, while the banksters make record profits in trading revenues borrowing at zero percent. I'm surprised the AARP had caught wind of this.
It's starting to happen:
http://www.calculatedriskblog.com/2010/04/unemployment-many-workers-exhausting.html
Nowhere to hide, but for gold.
Nicely done, Mr. Bruce.
Rosie v. Grant and GS v. MS. Let's get it on!
Goldman Sachs is more in the camp of LTZ - If the US has hyperinflation, a whole lot of people go broke because money loses its value. If the US has deflation, then those with money do not go broke because their money is actually worth more. So I gotta side with Rosie and Goldman as well.
Isn't it strange that GS is against "the big JPM" exactly when the sky is falling for them (GS) ?
Huh? Those who are levered, iow, the rich, go broke in deflation, and all of the banks.
People think banks have money? LOL...they are the most levered institutions on the planet along with governments. Look at the deflation of 2008, we were days away from every bank everywhere going completely tits up.
WTF is money? Who has money? Everyone has bank accounts that are worthless in a deflationary crash because the bank fails.
Bruce,
Excellent, thanks for sharing this.
As the euro disappears down the toilet the wealth fleeing eurobanks will need a safe haven. As long as $1.33 holds there will be more and more debt service pressure on the PIIGS (and UK, France and even Germany) until one of them breaks down. I haven't seen any mention of Germany resurrecting the DM but a secret meeting to implement just that is probably just ending in a 'basement meeting room' under the Bundeskanzleramt.
Once the investment bank linchpin is removed from the US markets there will be more safe haven capital flight (or, 're- allocation') here. I always figured if worst came to worst the Fed/Treasury would push one of their zombies off the end of the gangplank.
I never figured all of them would go off at the same time ...
Yep, relative performance.
You can't outrun the grizzly bear in the woods, but you can buy yourself time by outrunning your buddies.
all should read this as an explanation on the GDP report....http://www.npr.org/templates/story/story.php?storyId=126143909&ft=1&f=10...
Again, cash flows do matter, and the shortfall will have to be funded from somewhere. In this case a treasury market with way too much supply.
Nice post Bruce. Thanks.
Awesome article. Great comments illustrating how conflicting the situation really is; 1. There's enough dollars going around, so no problem. 2. M1 to M3 relationships, current lending & velocity suggest delfation 3. Sheer size of UST supply in relation to expected higher rates.
If I could add a few things;
1. Hate to bet against Mr. Grant
2. Proven govt ability, good or bad, to take extreme measures.
3. Ultimate responsibility of the FED is to NOT LET THE GAME TIP OVER. Let it stress a little, but keep it moving.
Perhaps we'll see a replay of what got us here...a sinister combination of circumstances where several aspects negatively contribute without consideration of the larger picture (stupid ratings, securitization, low rates, ninja loans, basic overleveraging). Learned a great term on this site recently....'Liquidity Experiment'. We really have no idea exactly how this plays out or the time frame. What outcomes are possible here? Where will the money flow that might not be in US paper or stocks?Long way from a military defeat? How about a hypersonic carrier killer cruise missle in a shipping container?
http://www.telegraph.co.uk/news/worldnews/europe/russia/7632543/A-cruise-missile-in-a-shipping-box-on-sale-to-rogue-bidders.html
A US carrier burning to the waterline in the Gulf would signal teh end of an empire.
Just like the Spanish armada getting toasted when England came to power ...
Um...England defeated Spain navy-on-navy.
These hypersonic cruise missiles are a lot of hype and not something the Navy is unprepared for.
Soc Sec tax rates are probably going higher IMHO. With that will come surpluses again if TPTB so desire.
The post may therefore be off the mark.
Give it time. Eventually a lot of the Social Security debt will be torn up, I think. When news articles start appearing about how millionaires are cashing their Social Security checks, you'll know the idea is being floated. Things will have to get a lot worse, but in the event of an emergency, Congress can make a lot of the national debt go away with the stroke of a pen.
What's the most powerful lobby group in Washington? The AARP. Old folks ALWAYS vote.
80% of old folks voted against Obama. Look how well that turned out.
80% of 50% does not = majority.
Great point. so why are we all worked up about govt debt, treating it like an individual with massive debt?? I totally agree with you.
Because they are DEPENDANT upon those SS TAXES to keep coming in to fund operations!
Sure, they can wipe out all their obligations by just not paying them, but they need the revenue from those programs.
SS has hidden spectacularly massive deficits for decades and nobody said shit about it. Even the vaunted Clitton "surpluses" were ENTIRELY SS and then the Congress and Bill got together at EOY to spend all of them. TreasuryDirect says the national debt never went down during the surplus years.
Because when the Gov starts changing the rules - no matter how necessary to extend the ponzi - then the people respond in kind. Means testing should have been instituted long ago. "Congrats! You won in life. Here is your money (sans interest) since you won't be needing the teat. Thank you for contributing (your earned interest) to the commonweal."
Too late for that now. When there is pain, and the Gov is seen as culpable, or at least contributory, then the good people don't view rules changes as kindly. I expect tax compliance to move towards resembling Club Med or some banana republic, no matter how many sawed off shotguns the IRS requisitions.
No reason to panic - stocks will reinflate the consumer who will spend to generate taxes -
to pay for all our gov's needs..If only Stalin had a stock market that was so easy , the USSR would have been a workers paradise.
Keep the mantra going.."They know what they are doing, Must watch CNBC, Must buy buy buy."
This is a dynamite article. Doesn't ZIRP imply recession, or depression, for the foreseeable future? If the MSM - Wanger - CNBC types want their cake, don't they get a side order of higher interest rates sooner rather than later? And doesn't the sheer size of the UST supply dictate higher rates at some point? Madhedgefundtrader would be proud - time to sell USTs, he says, I'm pretty sure.
But more importantly, where is Deadhead?
TPTB are taking us out one at a time.
Yes. The banks will be kept alive while the middle class slowly dies. The upper classes will be allowed to continue in their delusion that they'll be spared, right up until they're not. Divide and conquer.
The middle class intuitively knows that it is faced with a choice with many historic parallels: faced with the certainty of destruction, fight now while it still can?
This is a dynamite article. Doesn't ZIRP imply recession, or depression, for the foreseeable future?
Of course it does. Inflate the damn stock market to the moon. It doesn't matter. There is no volume and no public participation, so there is no wealth effect. This is a casino like the worst of the tech rally.
How can the economy recover when there is no net demand? Look at unemployment, small business, state budgets, real estate. Nothing but carnage. Or maybe Europe will start growing. LOL
Ben is fighting the wrong war. He's locked us into a deflationary spiral until the debt is paid off, but the localized depressions create an endless supply of debt. Nothing can improve until the banks quit sucking all the cash flow, or we give up all pretense and go Zimbabwe. There is no soft landing.
"Ben is fighting the wrong war."
Ben may certainly be fighting the wrong war from our perspective, but it is their perspective to keep all plates spinning in the air long enough with FED counterfeiting until such time as a final crisis is readied...the collapse into a grand banker scheme that no one can refuse, a planet-wide enterprise. The One has already been installed as president of the UN Security Council, and you're right, there will be no soft landing.
The game is obviously to trick the consumer into believing that everything is getting better.
"Look at the stock market!"
"Look at the new claims for unemployment!"
"Look at retail YoY!"
"Look at the improving housing market!"
Never mind that the stock market consists of five banks' prop trading desks playing with each other. Never mind that organic employment growth is far below the level needed to reverse unemployment trends. Never mind that spending came from a decrease in the savings rate, massive USG income transfers to unemployed, inventory growth. Never mind that the raw housing market numbers have declined for five months in a row, even seasonally adjusted numbers are off in 15 of 20 major markets, and foreclosure inventory is growing.
It is all a grand illusion to attempt one last kick of the can down the road before the bill comes due. None of what is happening can revive the credit-based spending spree that peaked in Oct 2007. Those levels are gone until price discovery leads to proper allocation of capital to new, dynamic--or at least viable--enterprises.
Since TPTB would be hurt the worst by deflation, the smart bet is on inflation...unless one of the event stack currently lined up (sovereign default, war in the Persian Gulf, etc.) causes explosive decompression before Extend & Pretend buys enough balance sheet repair.
Either way we are f*cked.
Can't trick the "consumer" into thinking they have a paycheck that they don't actually have.
+1. Well stated, kaiserhoff.
Concur.
Meanwhile Hurricane Deepwater is about to phuck the Gulf. Nice rapid response from Rahm.
Bruce has been on this all along http://brucekrasting.blogspot.com/2010/03/in-early-january-i-published-p... and IMHO it’s the most important story out there. SSTF - it’s not social, there is no security, there is no trust, and there is no fund – tipping negative is emblematic of the end of ALL the many years of politically inspired BS accounting that has enable the offal, myself included, of our “greatest generation” to monetize America’s three centuries of accumulated goodwill. The end of empires is always ugly – and a warning. Historically, these ends typically come with large scale military defeats.
Krasting is counting "interest" on the SSTF holdings as income. That's an illusion. Interest is just more money owed the SSTF by the same damned gov't.
Should just compare outlays to payroll taxes for the real picture. It's worse. Cashflow for SSTF is all that matters.
No I am not. Specifically excluded interest. My anaysis is pure cash flow. For the record, my number for interest is 119B. So the balance sheet will show a net increase in assets of +70 billion.
I am absolutely convinced that the cash flow number is what markets will focus on. The interest is something that should probably be brought up for a broader debate. The concept in flawed in my view.
We're a long, long way from any kind of meaningful military defeat. Afghanistan and Iraq are barely blips in the history of military involvement -- so even if you could call either a true "defeat" (They are operations. They're not wars) it wouldn't mark the end of the American empire.
More interesting however -- would be a massive proxy-defeat. The fall of Israel for example would IMHO mark the end of empire just as well.
Or a serious challenge to naval hegemony, might also mark the end of empire. If China for example were to establish dominance in the near-Pacific that would be a serious blip on the radar of historic power-shifts. But again, we're a long, long way from China having a navy that comes anywhere close to the US's.
IMHO -- The only serious threat that would leapfrog America's military supremacy would be an orbital nuclear platform. China could do this in the extremely near term. It would make the Cuban crisis look like a walk in the park.
If you're looking for military power-shifts as indicators -- It's either a defeat-by-proxy, or a technological leapfrog that will have to do it. Because we're a long way from a true loss on the battlefield.
"If China for example were to establish dominance in the near-Pacific that would be a serious blip on the radar of historic power-shifts."
You mean if their relatively cheap and technologically advanced ballistic anti-ship missile with a 2200 mile range turns our vast armada into floating coffins?
Back in the day, I decided, all things being equal, I would prefer to die on land. Instead I partied on land for a year at taxpayer expense. Not bad work if you can get it!
It's not easy to hit a CVN with a ballistic missile...China's "technology" is much ado about very little.
You are deluded; we haven't won a war for 60 years.
The empire is finished. Empires don't fall by military defeat, they rot over time from within. Empire is self-defeating moral and financial decay and it only took us 60 years, shortest empire lifespan ever.
Didn't we won in Grenada (operation Urgent Fury) in 1983? As I recall, we kicked their ass.
With the growth of reliance on contractors to do basic military work and contractors like Blackwater using non-U.S. citizens, is it even "our" military anymore?
China has difficulty producing water bottles that don't leak. The only orbital nuclear platform that they will build is for the toy stores, and that will be a copy from another country.
While inflation 'should' lead to a fall in bond values (but hasnt for years), does a fall in bond values have to lead to inflation?
................
M1 is up but M3 is down and the M1 money multiplier is negative.
And that's about all there is to the inflation/deflation debate. Until lending & velocity increases deflation continues. Banks have to lend their reserves to kick start inflation but their reserves are needed to back stop their erroneous asset valuations.
http://www.shadowstats.com/alternate_data/money-supply-charts
Expect continued deflation until the facts say otherwise.