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.

Comments

[Panafrican Funk...]

This is exactly correct, and I would also suggest that the banks and the Fed are buying T-bills not just for reserves; I think they're making a better risk adjusted yield spread than lending to people and businesses, even with the pitiful yields that they are getting with those T-bills.  The recent rash of people making strategic or otherwise defaults on their mortgage loans just intensifies their interest in not only increasing their loan/loss reserves, but their holdings in better risk adjusted yields in general. 

[Crime of the Century]

Oh, they'll get velocity alright. Good and hard.

[jippie]

The extra debt issued is equivalent to the deficit from the government and the SSTF (chuck in all the rest of the agencies, etc.). As such the money is there to fund the extra demand by definition. In the end all of the money will end up in some bank acount which will then buy treasuries, for at least part of the multiplied money base. So there will be no funding crisis. That is only going to happen if there aren't enough dollars around. but because it is a closed system there will always be enough dollars!

yet this does not mean we can't see inflation as all this deficit is just increasing the money supply not adding to the economic output of the country in the long term

[Crime of the Century]

Did someone announce a reality show competition for graveyard whistlers?

[i.knoknot]

i regularly eat lunch with a couple of primo candiates for that show.

bruce - thanks for making so clear what so many of us have been trying to share for so long. nicely written, relevant graphics, even i understand it...

as KD would (roughly) say... you can't argue the math - but Crime of the Century is spot on with the implication that you can choose to ignore it.

[overmedicatedun...]

Are you Japanese??

You hold the money theory of the Universe: "The Universe is a closed system no matter or energy can be lost or created"

add USA for Universe, and Money for matter and debt for energy..