Charts Of The Day: Why America Needs To Embrace The Fiscal Cliff Instead Of Kicking The Can Once Again

Tyler Durden's picture

Yesterday, during the Biden laughing show, which also occasionally panned right the GOP vice-presidential candidate, we showed what is arguably the one and only chart that should be discussed on each of these staged theatrical productions. The chart, which is presented below, shows that 40% of all US spending (and rising) is now funded through debt. In other words, the US is explicitly at the mercy of its creditors who while cooperating for now in a MAD game-theoretical tit-for-tat scenario, can very easily decide to just say no more, and cause a complete collapse of all Federal spending.

The only backstop, of course, is if the Fed were to monetize all debt issuance, which as we have repeatedly shown, the Fed is already doing for all gross issuance in the 10+ year bucket. It is only a matter of time before the Fed is force to monetize each dollar as it exits the US Treasury, as more foreign entities join the China buyer strike, and instead of recycling petrodollars in US debt, continue to buy hard assets such as gold, as China has been doing for the past 18 months.

However, where it gets fun, and where the issue above intersects the most important event this year: namely the election of America's president, is when we look at what the government's own Office of Management and Budget forecasts will be US debt and interest. It goes without saying, that the chart shows just how even more unsustainable the currently unsustainable US situation is. Because if nothing changes in the trajectory of US spending, this country is due for a very painful readjustment, only instead of doing it on its own terms, it will have to be in the context of Greece, when it has to fight for a cash disbursement from some other multinational corporation every single day.

This is how David Rosenberg, who defends biting the bullet, and letting the Fiscal cliff play out as at least it will force America out of its epic debt binge, lays it out:

There is never going to be a good time to put Washington on the debt treadmill. To be sure, it will imply a negative GDP growth rate in the first quarter of 2013, perhaps into the second quarter as well, but that would be it. The retrenchment would be more of a level adjustment, albeit downward, but not a multi-quarter persistent slide in economic activity. The private sector will re-build GDP from a lower base, and with the prospect hopefully of some meaningful tax reform and the removal of clouds of fiscal uncertainty, we could readily climb out on the other side of that cliff. It's not as bad as everyone fears... we will get to the other side, and with fiscal finances in much better shape. That is the silver lining in the cloud.


As I said- there is no good time, but better now than waiting to be shocked into the retrenchment later on. If left unchecked, the Federal debt/GDP ratio will breach 100% within the next two or three years. Do we really need to turn European? And more importantly, even under a sustained low interest rate policy, debt service costs will continue to bite into the revenue base - so much so that they will soon begin to absorb more than 20% of total tax receipts. At a time when grim demographic realities will push dependency ratios higher and with that ever-spiralling entitlement spending, the power of compound interest on a continued mountain of debt even assuming years of low rates will ensnare fiscal finances and seriously limit our policy flexibility in the future.

Well said. And sadly, one big pipe dream. Because if there is one thing one can be certain is that no developed country will ever again do the right fiscal thing, as it means a complete political overhaul once the people realize they had been lied to for decades, and all those promises they have been swamped with in years past by this candidate and that, are just not coming true. The reason: the money has run out.

And yes, the correction will come, but only after everyone has lost control of the big picture. When the correction finally does come, it will be that much more painful, and that much more akin to the catastrophic event that really ended the first Great Depression.

Because Mark Twain was right all along about the whole history rhyming thing.

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Dalago's picture

If they kick the can down the road again there will be inflation.  No shit?  No shit.  They're probably planning it that way.  This "cliff" should be called a responsibility; a responsibility to stop increasing government's credit card limit.  Privatize Social Secuity.  Start Health Savings Accounts.  Gov't ovbi. can handle the People's reponsibilities.  Which reminds me... just get rid of Federal Government.  Only have it to enfore the Constitution the States agree upon.

SafelyGraze's picture

OT, but per fed asset calculations --


Q: What is an as-of adjustment?

A: An as-of adjustment is a memorandum item that is applied to an institution’s cumulative position to offset the effect of errors or to recover float incurred by the institution. An institution’s cumulative position is essentially its average end-of-day balance maintained over a maintenance period relative to its balance requirements. An as-of adjustment is distinct from the accounting entry used to correct the institution’s account for the error.


AldousHuxley's picture

fiscal cliff = reality


bring it on.

All Risk No Reward's picture

Change the money system or prepare for the 100% certain collapse.

Debt Money Tyranny

I heard the Federal Reserve System explain thusly:

The Federal Reserve System is like a government mandated (both parties, people) national privately controlled credit card with no grace period and no benefits.  Your federal income tax is the minimum monthly payment on the national credit card.  The only way you can get paid for work is if someone has previously taken a cash advance and will pay you the proceeds from it.
~Kyle (Alex Jones Show, 10-11-12)

Now, most people "get" that there is some group that controls American Express and profits from its operation.

The same is true of the national credit card.  It has a group that controls and profits, too.

They just happen to be machiavellian criminals and whole societies are their victims.

SafelyGraze's picture

see above re: OT, but per fed asset calculation (courtesy fedResChi) --

The reserve credit given for checks not yet collected is included in Federal Reserve "float."

On the books of the Federal Reserve Banks, balance sheet float, or statement float as it is sometimes called, is the difference between the asset account "items in process of collection," and the liability account "deferred credit items."

Statement float is usually positive since it is more often the case that reserve credit is given before the checks are actually collected than the other way around.

Published data on Federal Reserve float are based on a "reserves-factor" framework rather than a balance sheet accounting framework.

As published, Federal Reserve float includes statement float, as defined above, as well as float-related "as-of" adjustments.

These adjustments represent corrections for errors that arise in processing transactions related to Federal Reserve priced services.

As-of adjustments do not change the balance sheets of either the Federal Reserve Banks or an individual bank.

Rather they are corrections to the bank's reserve position, thereby affecting the calculation of whether or not the bank meets its reserve requirements.

NotApplicable's picture

A bankster named William Bryan Jennings? LOL

kaiserhoff's picture

Cut government salaries in half, and benefits by 90%.  This will be much easier when the kleptocrats can't get rich raping the taxpayers.

AldousHuxley's picture

that means bankruptcy to more than 90% of the US population....mostly in republican state where they don't produce world competitive exportable goods except natural resources.


better way would be force elites to get richer not by cheating americans, but by adding value.



Thoth's picture

They should get whatever the median family income is, no pension, and no direct stock market participation, 401K only. I would expect we would routinely get a bunch of surprise median income stats from the BLS though...

Poetic injustice's picture

They will go on strike then! (And you will not notice difference between working and striking government employee).

Overfed's picture

Ballot in Spanish? Si. Firme por Ronaldo Pablo!

Jim in MN's picture

Slash that budget!  It's invigorating!

Just use this principle:  Lobbying by industry as a share of total lobbying = share of budget cuts.

There, Fixed.

kaiserhoff's picture

Me likey.  How about a corollary?  Lobbying by any and all foreign persons/governments shall be punishable by death..., or worse.

iDealMeat's picture

Can will be kicked...  Because it can be..  no one cares.. it won't ever be paid back...


Its the same thing as smelly garbage piling up in China..  People just get used to it and never do anything about it...


Darth Vader was right..  Deficits don't matter.

Unprepared's picture

So how long before the can hits the fan?

Ham-bone's picture

This is all so funny - all the sequester says is a $1.2T cut in new planned deficits over the next 10 years...that is $110B less in deficit spending in '13.  On a monthly basis, about $9B less in deficits (monthly only $90B instead of $100B deficit).  That this "cliff" is the end of the line shows how far gone we are.

The Fed will be buying $85B in assets monthly in '13 (MBS and T's) but somehow the absence of $9B in largesse is the "end of the line".

CrashisOptimistic's picture

No.  You have this wrong, and it is critically important.

The Sequester says there will be 1.2T cut IN SPENDING.  Not in deficits. IN SPENDING.

Ham-bone's picture

Not sure I see the difference.  Take this years budget and reduce by $110B ($1.2T over 10yrs).  That is a reduction in spending of $110B and thus theoretically $110B less in '13 defiicit (also dependent on tax increases, revenues, interest expenses, etc.).  I guess you are suggesting deficit could be larger but I'm assuming some linkage between spending and deficit...guess they don't have to follow in lockstep? 

Still, net-net we're talking about an '12 $3.8T budget will be cut to... $3.8T in '13???  The smoke and mirrors game of not growing spending as planned, but no actual cutbacks.  No cutback in spending, only not a growth in spending as was plannned???  The reason for the cuts is due to the automatic growth of spending in all the entitlement programs opted out of the "spending cuts".  So, the same $3.8T won't buy what it did in '12 so all the "radical spending cuts" come in defense and discretionary. 

And then in '14 the "savings" is a less than planned growth of spending to $3.9T???

This austerity will destroy us...the HORROR!!!

iDealMeat's picture

+1, Thx Ham-bone.  I re-read my comments because of bag heads like you.


chart_gazer's picture

been reading grants nonsense for years.  he is blinded by his own ego. the fed is ahead of him

the fed can create new money and buy every last $ worth of gov debt. put it on their balance sheet, collect the interest from the gov on it, then give it back to the gov as profits from the fed. at some date they can just say, there is no more debt, you (gov) owe me nothing, its gone. what has the fed lost? nothing, they created $ out of thin air to buy it. the size of the feds balance sheet doesn't matter. 

some say all these newly created $ will cause inflation. some will, but since there is little demand for the money (slow to no growth in the economy) most new money will just go to propping up the stock market and fighting the deflation of other assets (housing). what inflation does exist will be poo pooed with their f__d up PPI CPI formulas. 

while they do this, and keep interest rates low, banks earn their way back to solvency.

remember, the fed is banking cartel, their sole interest is protecting the banks. they could care less about the effects of their actions on anyone else.


blunderdog's picture

Quit giving Darth Vader a bad name.  He had a lot more integrity than Cheney ever did.

LawsofPhysics's picture

In other words, massive mis-allocation and mal-investment of capital and resources.  It can be fixed in an adult and responsible manner (not likely with the criminals in charge) or the animal spirits can fix it when the supply chains start failing.

Will humans be smarter than yeast, my guess is probably not.

ZerOhead's picture

More likely the animals spirits will make a final killing by driving supply chains into the abyss...

LawsofPhysics's picture

In the paper  world or the real world?  Please, wake up, when fraud becomes 100% of the status quo, possession becomes the law.

All paper promises will dissappear.

ZerOhead's picture

Oh I'm awake alright. I've been long land and PM's so long and successfully that my shrink is now questioning his own sanity...

Paranoid schizophrenic my ass...

Jim in MN's picture

A paranoid man is a man who knows a little about what's going on.

--William S. Burroughs

francis_sawyer's picture

Learn it... Know it... Live it... [Embrace it]...


Lost Wages's picture

Soon humans will return to a primitive way of life. It won't be that bad.

Unprepared's picture

Topless women everywhere... yeehaa... wait... does that mean we currently live a primitive way of life?

CrimsonAvenger's picture

Not primitive enough, from where I'm sitting.

francis_sawyer's picture

Nude Pygmies... We used to only have National Geogrphic for that...

Winston Churchill's picture

Return to a primitive way of life ?

Must have missed something.

FL_Conservative's picture

What no iPhones and streaming video everywhere?  Are you fucking kidding me?

fonzannoon's picture

is it me or is rosenberg understating things a bit? and by a bit i mean an epic shitload.

Roubinesque's picture

Rosenberg's calls in 2005 and 2006 were dead-on-balls accurate. But he never jumped up and screamed about it. The charts did the screaming much louder.

fonzannoon's picture

2 quarters of choppy waters to wind down 16 trillion?I; I'll take it!

ZerOhead's picture

While I love the guy... Rosenburg has lost it this time.

Though he is right about the need to wind things down sooner rather than later you don't just walk off an 8% hit to GDP in two quarters. It wasn't so long ago that economists used the phrase GDP MULTIPLIER when talking about the effect of increasing spending to stimulate the economy. I expect it works in reverse as well...

yrbmegr's picture

It won't be that bad.  1% tops.

gjp's picture

No kidding. He says "do we really want to turn into Europe"? The us should be so lucky. What a farce. Europe - I.e. Germany and other Nordic countries at least make some capital good the rest of the world wants. Europe has not been completely taken over by FIRE and consumption as has the US. The US is further gone than anyone's with the possible exception of the UK. Just a chip off the old block it seems ....

bank guy in Brussels's picture

Not to mention that on the European continent, there is almost no one in jail here, there is almost no fear of police or judicial or lawyer harassment, quite little crime and, in north-west Continental Europe, zero poverty among legal residents.

Our fear here is that our little paradise may be undermined, by the EU-Troika brutality in the Mediterranean sector, and by the contagion of general economic malaise that will finally chip away and demolish what we have in our quadrant of Europe, when our teetering banks finally collapse as well ...

That was a funny remark of Rosie.

Most of the world would be glad to live in a society with no poverty, everyone having health care, a genteel drinking-at-the café lifestyle, and almost no 'police state' oppression or hassles.

resurger's picture

Derivatives Notional OS = 220 Trillion for the biggest 5 US Fradulant banks (When no one will buy US paper, those guys will do)

MBS = 9 Trillion to be prinited thorough QEternity

Japan Debt = 1 Trillion

China Debt = 1 Trillion

GCC Debt = 3.5 Trillion

How the fuck will the Fed buy paper to lower the portfolio duration?! Maybe they should search for yield in Zimbabwe or buy AAPL!

in 10 years time, Debt/GDP = 200% +

Slowly then suddenly, when all those creditors start dumping thier holdings, it will be too late, even if you monitize from here to pluto.


NotApplicable's picture

I expect the Fed to completely abandon the idea of measuring risk via portfolio duration (after all, risk is a market phenomenon) as they move further and further up curve, flattening as they go.

Roubinesque's picture

Can we be annexed by Canada and elect David Rosenberg to be our first Canamerica President? Perhaps Joni or KD can sing at the inaugural.

fuu's picture

Why would we want to listen to Karl Denninger sing?!?

NotApplicable's picture

You can fly whatever flag ya want, buddy. Just keep your enslaving collectivism to yourself though, as there's already more than enough evil-do(good)ers to go around, okay?