Debt Ceiling

The emergency room doctors are missing the bigger problem ...

So much for the market "completely ignoring" the total chaos and complete cacophony out of the tragicomic DC soap opera which is transitioning into less of a comedy and into more of a tragedy with each passing day. For everyone still wearing rose-colored glasses here's a refresher: stocks dropped, the S&P expressed in dollar terms, or adjusted for loss in dollar purchasing power is now negative for the year, bonds tumbled despite a "strong" auction driven almost entirely by Direct Bidders on the margin, and, the kicker, US CDS is now at 56 bps: US default risk is now the highest since February 2010.

Something troubling happened in D.C. today, where it seems that the Senate Republican leader basically just folded like a cheap suit in the ongoing farscial standoff on the debt ceiling (which luckily should bring the whole comedy to an end and the nation can progress with its previously scheduled ponzi collapse). In essence, as Bloomberg says, according to McConnell's proposed 3-Stage plan, "The debt-ceiling increase could occur without the companion spending cuts, McConnell said." Ironically, when we observing comparable posturing by Boehner from two days ago we said "in two weeks we get news of no tax hikes, and no deficit reduction, which will be spun by the great diversionary media machine as the great compromise, and, of course, leading to a $2.5 trillion debt ceiling hike. Win, win for everyone." It seems precisely this is on the agenda. Details on McConnell's plan to basically let the President do whatever he chooses: "Senate Republican Leader Mitch McConnell proposed a “last choice option” for increasing the U.S. debt limit in three stages in case President Barack Obama and Congress can’t agree on a deficit-reduction plan. McConnell’s plan would let the president raise the limit, while accompanying it with offsetting spending cuts, unless Congress struck down his plan with a two-thirds majority. Don Stewart, a spokesman for McConnell, said the plan would allow Obama to raise the debt limit while putting the onus on him and congressional Democrats for any failure to cut spending." Surely the president would be shaking in his boots knowing that if he were to cut spending the "onus" would be on him. Here is how the Republican justifies this betrayal: "The proposal is “not my first choice,” McConnell said, adding that he wanted to show the financial markets that the U.S. will not default on its debts. He said he continues to seek a broader deal to raise the $14.3 trillion debt limit with congressional Democrats and the White House." Funny: this is the same logic that Jean-Claude Juncker used when validating outright lying to the media, and general public. It appears there are little if any differences between politicians in Europe and the US when it comes to lies.

It worked for Hank Paulson who showed up in Congress with a three page termsheet, delusions of grandeur, a scary story, and an easily frightened audience. Why should it not work for the president. As Reuters reports, "Barack Obama said in an interview on Tuesday that checks to recipients of the Social Security retirement program may not go out in early August if he and congressional leaders do not agree a debt deal. "I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue," Obama said in an interview with CBS, according to a transcript on the network's web site. "Because there may simply not be the money in the coffers to do it," Obama said." Is that so Mr. President? Please explain then how according to the most recent DTS the YTD (fiscal) amount paid out on Social Security is $469 billion, well below the amount collected from Federal Tax Deposits of $780 billion. As a comparison, this number is lower than the combination of Medicare and Medicaid ($638 billion YTD), and the combination of Defense and Education Payments ($480 billion). Indicatively, Federal salaries are a whopping $137.6 billion, or said otherwise, all of the SSN payments to date are just three times bigger than what the government pays its own employees. Perhaps a bigger issue is that the debt held by the public has increased by $720 billion YTD, a number which will soon grow to $1.5 trillion if the government does get debt hike it so desperately needs.

After meeting for exactly 75 minutes, the president and members of congress achieved absolutely nothing except for what ZH readers already knew: that a debt deal has to be reached by July 22 or else. "President Barack Obama said Sunday that "we need to" work out a debt deal within the next 10 days as he convened a meeting with congressional leaders, aiming to fashion a deficit reduction package for the next 10 years. As the meeting opened, Obama and the leaders sat around the table in Sunday casual dress. Asked whether the White House and Congress could "work it out in 10 days," Obama replied, "We need to." Despite Boehner's preference for a smaller, $2 trillion plan for deficit reduction, White House aides said Sunday that Obama would press the lawmakers to accept the larger deal. Republicans object to its substantial tax increases and Democrats dislike its cuts to programs for seniors and the poor. The aides, however, left room for negotiations on a more modest approach." And just like on Friday when the president's appearance was heralded as a harbinger of a massive NFP beat only to be the biggest let down since Geithner's TV appearances in February which sent the market down by 10 S&P points each time, so the president will address the nation tomorrow. From Reuters: "U.S. President Barack Obama will hold a news conference at 11 a.m. EDT (1500 GMT) on Monday about the status of negotiations to cut the deficit and raise the debt ceiling, the White House said on Sunday. Obama met with congressional leaders for about 75 minutes Sunday evening and will meet again with them on Monday "to discuss the ongoing efforts to find a balanced approach to deficit reduction," the White House said, without giving a time for that session."

Bill Buckler presents an amusing compendium of facts, let us call them inconvenient truths, in the latest edition of his newsletter, some of which would make for very entertaining anecdotes if presented at the Biden "deficit cutting" talks, which also, and very paradoxically, aim to cut US debt by increasing it.

Statement by Speaker Boehner on Debt Limit Discussions

House Speaker John Boehner (R-OH) released the following statement today regarding ongoing debt limit discussions with the White House:

"Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes. I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase."

Zero Hedge translation: in two weeks we get news of no tax hikes, and no deficit reduction, which will be spun by the great diversionary media machine as the great compromise, and, of course, leading to a $2.5 trillion debt ceiling hike. Win, win for everyone. Except America's people of course, but who gives a rat's ass about them: certainly not their "elected" muppets, all of which are for sale to the highest Wall Street bidder.

While it is a 99.9% given that the soap opera on the Hill will be over very shortly (most likely courtesy of an outcome that will send the AARP in an apoplectic yet powerless to change anything fit of rage), there is always the chance that politicians will screw something up. After all America is in its current predicament primarily courtesy of the same politicians who are now scrambling to retain face with the electorate, while at the same time perpetuate the status quo. Which is why we present this just released analysis from the world's biggest hedge fund, Bridgewater, which asks the logical question: "what happens if the debt ceiling is not raised" and provides it answer in excruciating detail. The primary focus is what happens to Treasury holders as this would be the security impacted first and foremost: "As we in detail go through some of the largest holders of Treasury securities and the various places where Treasuries are used in collateral and index agreements, it looks to us like there is a fair amount of leeway to not immediately react in the event of a default. It doesn’t look like most of these entities would need to either immediately liquidate their holdings or renegotiate contracts where Treasuries are used as collateral due to ratings downgrades. While it looks this way, we can’t be certain of this, because there are so many financial interconnections where a ratings downgrade or default on Treasuries could create unforeseen knock-on effects. And of course, there is the risk, albeit small, of a more substantial loss of confidence in whether the US will continue to pay on Treasuries, which would become an increasing risk if the debt ceiling negotiations drag on for a while after the official default. That could lead to significant liquidation of holdings and logistically disastrous renegotiations of contracts." Granted, this is the worst-case outcome. For the various shades of gray, and for the other implications of a Default, none of them pretty, read the report below.

As the chart below shows, while at the end of every quarter, the US Treasury is traditionally supposed to fund a quarterly payment into the various government retirement funds (previously discussed here), this time around, instead of putting in even one penny into G and CSRD Funds, Tim Geithner has decided to defraud government retirees by the most since the US debt ceiling was breached, or, specifically, since intragovernmental "holdings" became a mere plug to make room for marketable debt. So while the debt held by the public increased by $21 billion following the settlement of last week's auctions, in order to stay under the $14.294 billion ceiling, the Treasury was forced to "disinvest" another $20 billion from retirement funds. At this point the various funds that fall under this umbrella are underinvested by at least $120 billion and likely much more. Of course, this is not an event of default as per Geithner's fine print: as soon as the debt ceiling is hiked, these will be the first funds that are replenished. On the other hand, if there is no debt ceiling hike, and courtesy of marketable debt having priority to intragovernmental debt, government retirees are increasingly becoming the impaired class in what may be shaping up to be the world's biggest bankruptcy filing in history.

When it was reported last week that Eric Cantor, who had just walked out of Biden's debt ceiling talks leaving Democrats to talk amongst themselves, was pushing for a "balance budget" amendment to the constitution, many took it as merely more posturing in the relentless debt ceiling drama that is rapidly approaching its inevitable conclusion (under one month left until August 3). It now appears that this may have been more than a bluff, at least to members of the Tea Party. According to the Huffington Post, "Sen. Rand Paul (R-Ky.) is planning a Senate filibuster next week in an attempt to force debt ceiling negotiations into the open." More: '"We've had not one minute of debate about the debt ceiling in any committee," he said in an interview with C-SPAN's "Newsmakers" that aired on Sunday. "We haven't had a budget in two years. We haven't had an appropriations bill in two years. So I'm part of the freshmen group in the Senate that's saying, 'no more.'" Paul's plan: "Next week, we will filibuster until we talk about the debt ceiling, until we talk about proposals."" He added that a group of senators in the "conservative wing" of the Republican Party will also be presenting a proposal to tie raising the debt limit to passage of a balanced budget amendment." So, just more posturing, which may now be indicative of the first splinters within the republican party, especially after John Cornyn said the GOP may accept a "mini deal" on raising the debt ceiling, or actual concerns about the debt hike that have to be appreciated? For now, at least judging by the market, the debt ceiling rise is a foregone deal.

Here is the real danger with the debt ceiling deal...

Two down. 48 to go until Meredith Whitney is proven correct beyond a reasonable doubt. After New Jersey was forced to reach out to JP Morgan for an emergency bridge loan a few days ago, it is Minnesota's turn. From ABC: "Minnesota's government has shut down, ahead of the holiday weekend, for the second time in six years after state leaders failed to find common ground on resolving a $5 billion budget deficit. Thousands of state workers will be laid off, state parks will be shuttered, the issuance of fishing licenses will be halted and the Minneapolis zoo will be closed. Road projects will also grind to a standstill just as people hit the road for the holiday. A midnight deadline passed without an agreement as talks between Democratic Gov. Mark Dayton and top Republicans unraveled over Dayton's proposal to impose taxes on the state's top earners, a move on which top GOP officials have refused to budge...Some programs that will continue unabated include critical services including the State Patrol, prisons, disaster response and federally funded health, welfare and food stamp programs." Granted this is not a first: "Only four other states -- Michigan, New Jersey, Pennsylvania and Tennessee -- have had shutdowns in the past decade, some lasting mere hours. Minnesota's government partially shut down under then-Gov. Tim Pawlenty in 2005 over a budget fallout." However, if NJ is any indication, as predicted, expect ever more states to bypass the municipal route of funding, and appeal directly to commercial banks. Which will generously provide as much Fed-generated one and zeros...in exchange for 80% LTV collateral of course.

One of the side effects of the US hitting its debt ceiling in mid-May is that while the components of its total debt have been shifting, with total marketable debt slowly grinding higher, while intragovernmental holdings (i.e., government retirement pension accruals) declining, the total thing has been flat as a pancake at just $25 million below the mandated ceiling. Since May 16 (or 57 working days now), total US debt has been $14.345 billion and not a penny more. Yet the issue is that with the US expected to have a roughly $1.5 trillion budget deficit in the calendar 2011 year, the ongoing contraction in debt issuance is only temporary. Basically when and if the debt ceiling is lifted, the Treasury will not only have to issue as much debt as before, but it will have to issue massively more in the short term to catch up to the ongoing run rate, and also in order to prefund the same retirement accounts it has been plundering for the past 6 months. So here's the math. As the chart below shows, since May 16, the cumulative divergence between where total debt is and where it should be is now a whopping $265 billion. That's right: when the debt ceiling cap is finally lifted, and it will be lifted, with republicans "kicking and screaming", Geithner will suddenly find himself needing to plug a gap of over 2 months worth of accrued treasury issuance. Mathematically, this means the Treasury will have to sell not the $100 billion or so in net debt but well over double that in August and September. And this will happen at a time when there is no QE2 to soak up the excess slack.

5 weeks ahead of the day when the debt ceiling "extend and pretend" plan ends, talks have broken down, and in order to hike Congressional Nielsen ratings, this time seemingly terminally. From Reuters: "U.S. Deficit-reduction talks led by Vice President Joe Biden have reached an "impasse," House of Representatives Majority Leader Eric Cantor said on Thursday, adding that he will not participate in the meeting of the bipartisan group that had been scheduled for later in the day. Cantor, a Republican, said the group has identified trillions of dollars in spending cuts, but had been unable to resolve a disagreement over tax increases Democrats sought. A Senate Democratic aide said the two sides "need to continue talking", and were continuing to talk. But an aide to Senator Jon Kyl, a Republican member of the Biden group, declined to comment on whether the senator would attend Thursday's scheduled meeting."

So much for the engrossing "Debts of our lives" soap opera. In the most expected outcome possible, the "best hypocritical actor" Oscar winners known as Republicans have caved and according to chief Senate republican sock puppet Mitch McConnell "Congress and the White House could raise the debt limit for a few months while they seek a comprehensive, long-term budget deal." Of course, when the $300 billion or so "temporary" hike which will last the US government for just under two months, we will get another temporary extension, and then another, and so forth, until the current batch of Oscar winners is voted out en masse yet again, only to be replaced with another set of sock puppets, and the posturing and the drama, not to mention the comedy, can begin anew. Luckily the G-Fund will at least get a temporary reprieve until its is plundered again, some time in late August, early September, when the debt ceiling is breached again, and an unmanageable debt load has been resolved through... the issuance of more debt. Don't be surprised to see the net notional US CDS outstanding to continue its torrid pace of sequential increase.