Stockman Fears Fiscal Bloodbath As "Mother Of All Debt Ceiling Crises" Looms

Tyler Durden's picture

Authored by David Stockman via The Daily Reckoning,

While the Imperial City is frozen in the Second Coming of Comey, it doesn’t mean that the Washington spending machine is on pause. In fact, the Treasury’s cash balance yesterday stood at only $153 billion — down by $130 billion just since the tax season peak was reached on April 25th.

 

Uncle Sam has been burning cash at a rate of $3.2 billion per calendar day since then and has no more room to borrow. That’s because the public debt ceiling is frozen at its March 15th level ($19.808 trillion) and the mavens at the Treasury Building have run out of borrowing gimmicks.

The countdown to the mother of all debt ceiling crises is now well underway — with the nation’s net debt sitting at $19.69 trillion. That figure, in turn, is up nearly $500 billion since FY 2016 ended on September 30 with the net debt at $19.22 trillion.

We itemize this torrent of red ink not merely to lament the nation’s dire fiscal plight, but to document a practical point. It will be impossible to pay Uncle Sam’s bills in full after Labor Day unless the debt ceiling is raised well the $20 trillion mark.

Exactly 36 years ago, Washington stood on another symbolic threshold — that is, raising the debt ceiling over the $1 trillion mark for the first time.

Back in October 1981, however, the Gipper was in the Oval Office at the peak of his popularity. He got the debt ceiling over the symbolic barrier at that time because he could still credibly promise that the budget would be balanced within three years. That was after his already enacted tax cuts became fully effective and the already enacted spending reductions took hold.

The nation’s balance sheet then was relatively pristine compared to what it is at present. Even at $1 trillion, the public debt amounted to just 30%of GDP — a far cry from the 106% ratio presently.

Reagan vs Trump Debt Ceiling

Before Capitol Hill gets bogged down in a sweaty August slog desperately looking for votes to raise the debt ceiling by several trillion dollars, it will have mid-year budget updates. They won’t be encouraging.

As my colleague Lee Adler has pointed out, Treasury tax collections have slowed to a crawl. Overall collections are barely even with prior year, and even withholding payments are now coming in at barely 2% on a year/year basis. That is far below the built-in spending growth rate of about 4% — and says nothing to the big increases for defense, law enforcement, border control and infrastructure being sought be the Trump White House.

The four week moving average of withholding collections — about as accurate a real time measure of the US economy as exists — is running below the average wage rate gain of about 2.6% per annum. That means real wage growth is turning negative — not accelerating like the “escape velocity” narrative being peddled by Wall Street.

Witholding taxes annual percent change nominal

The Donald’s odds of leading Washington over the $20 trillion threshold are not even a tiny fraction of the Gipper’s at the time of the $1 trillionbarrier. The latter’s job approval rate was over 60%, whereas the Donald’s will soon dip into the low 30s as the RussiaGate prosecution gathers full force.

Back then it was still possible to pass a clean debt ceiling increase because there was always an end in sight. That is, the fiscal projections always showed a balanced budget or surplus a few years down the road that enabled the illusion of “one and done.”

No more. There is $10 trillion of new deficits built-in over the next decade — even with the Congressional Budget Office’s (CBO) rosy scenario economic forecast, and the deficit path widens, rather than narrows, over the ten year period. By 2027, in fact, the CBO baseline deficit is back above 5% of GDP.

The long and short of it is straightforward. The Democrats are not about to bail-out the Donald when they believe they have him on the ropes. At the same time, there is no GOP majority for any meaningful deficit reduction plan that could be attached to a debt ceiling increase bill as a legislative quid pro quo.

When the Senate GOP committee now working on an alternative health care bill reaches a consensus — if it ever does — there will be virtually no Medicaid cuts left. The so-called moderates have insisted that the Obamacare expansion must stay in place at least for the next five years or no dice.

At the same time, the Donald has boxed himself in with his reckless promise to ring-fence Medicare and Social Security. But when you set those two giant entitlements aside, along with Medicaid, you have taken $2 trillion per year off the table; and that quickly mushrooms to nearly $2.5 trillion per year when you add in $200 billionfor Veterans, the earned income tax credit and retirement checks for former military and civilian employees of the Federal government.

Yes, the Congressional GOP could perhaps agree to a 10% cut ($7 billion) in the $70 billionfood stamp program and a few billion more from some of the lesser low-income entitlements. But self-evidently that’s a rounding error in the scheme of things.

So when foreseen is not a tale of a Trump Fiscal Stimulus, but a Fiscal Bloodbath, take it to mean just that. And unlike the saves which were put together at the 11th hour in August 2011 and October 2015 by President Obama and Speaker Boehner, this time there will be absolute legislative paralysis.

It seems abundantly clear that Speaker Ryan is not ready to quit, and the Freedom Caucus has no intention of voting for a so-called “clean” debt ceiling increase.

Instead, Washington is heading for the unthinkable. That is, the need for the US Treasury to prioritize and allocate spending based on the available inflow of revenues.

That will come as a giant shock to those on Wall Street who fail to understand that Washington is in the midst of triggering the 25th amendment, and that the system will soon be ungovernable.

The prospect of allocation will also mean that debt service, social security checks, military expenditures, law enforcement, Federal payrolls and other high priority payments can be met from current receipts for an extended period of time, thereby prolonging the stalemate even further.

So the Wall Street casino may well shrug off the Comey hearing on the grounds that he did not deliver a red hot smoking gun after all.

But that will prove to be just one more chance to get out of harm’s way. What comes next is a debt ceiling Fiscal Bloodbath that will remove all doubt.

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Doom and Dust's picture

It's going to be the UK before the US. QE in a stagflationary, politically unstable economy with a sinking currency..

Fo?low the BIG money.

BaBaBouy's picture

NAW... Trump Will Cave... He Won't Endanger his Own $$$ Empire...

NoDebt's picture

We talk about the debt ceiling as if there's an alternative to raising it.  There is no such alternative.  Even if all non-discretionary spending was cut to zero the feral government would still be running in the red.

 

Haus-Targaryen's picture

Exactly this. 

The hoice is raise the debt ceiling, or not and kill the world's economic system and a few hundred million people along with it.

Stuck on Zero's picture

Debt crisis ... the thing that precipitates the collapse of socialism.

HockeyFool's picture

It seems like Stockman runs this exact same story (the sky is falling!) ever couple months. Yet the sky never falls.

open calender's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

Bay of Pigs's picture

Exponential debt growth has been the issue for decades.

The FED is the problem. All else is noise.

I am a Man I am Forty's picture

Never invest by what Stockman says.  One thing both parties agree on is MORE money meaning more debt.  They aren't even going to make good theater this go around.  They will raise the debt ceiling without any issue.

Sick Monkey's picture

You have to admit it would be a pretty good wakeup call. Eventually it has to happen probably within the next two presidential terms. Of course the US is just one of the players here. Question is who will flinch first.

Herodotus's picture

The UK will be cutting military spending in the next budget.

Doom and Dust's picture

And tribute's due too.  Empire 2.0 won't come free you know.

Dollars please no Sterling. 

Got cable?

bobdog54's picture

It's bloodbath time...

No more ignoring reality.

No more lining their own congressional pockets.

aqualech's picture

They will NEVER enforce a ceiling. Dollar will someday crash, which the 0.01% is prepared for.

Stuck on Zero's picture

There's a backup plan. It's a great big Platinum coin that's being minted as we speak.

aqualech's picture

They will NEVER enforce a ceiling. Dollar will someday crash, which the 0.01% is prepared for.

charlewar's picture

why worry about U.S. debt for at this very instant our Federal Preserve Bunk is creating enough new money to pay off all our old debts. Sleep well tonight on that thought.

Catullus's picture

Because the entire world uses UST as collateral. The impairment of tier 1 collateral would create the mother of all margin calls

Bastiat's picture

But UST bonds are the means by which that money gets from the Fed to the Treasury.  Sure the Fed can monetize the bonds--ie just create the money to buy them--but it can't just give money to the Treasury. 

Bill of Rights's picture

Said from his $11 million dollar condo...

NoWayJose's picture

Stockman needs to stop pounding the calamity button all the time. If the debt ceiling is hit, then Ryan and McConnell lose their jobs. They are not going to kill their own leadership jobs. That said, they are scoundrels trying to milk as much as they can from the deal.

Overleveraged_and_Impatient's picture

There will be a bloodbath. The blood being the blood of bears. We are more likely to see S&P 10,000 then we are S&P 1000 again. 

Every single day it's the same thing. Bad data, Terrorism, mass layoffs, less high paying jobs, yada yada. And then what happens??? The President's Working Group on Financial Markets brings us to NEW ALL TIME HIGHS!

I am no longer falling for it. I lost some money as a bear last year, but now I'm 3x Leveraged and Long S&P 500. I'm up about $47,000 on the year and will be quitting my job soon.

Now is not the time to be skeptical. Now is the time to follow the money and get on the train.

actionjacksonbrownie's picture

My family of 4 lives on $27000/year, so $47000 would be quite a nice income for us, to say the least. People who say $47K is only a few months expenses are completely out of touch with most people's reality.

Tejano's picture

Good on ya'! Hope you're stackin' some...just in case.

actionjacksonbrownie's picture

We bought a little bit here and there up to about 12 years ago. Since then inflation has pretty much killed our ability to put away any savings, but luckily we haven't had to sell the bit we have... so far. The way things are going, I can see us being forced to sell at the very bottom - just like TPTB want us to. Not much I can do about that though.

Tejano's picture

Hang tough. Best wishes to you and your family.

101 years and counting's picture

"I'm up about $47,000 on the year and will be quitting my job soon."

 

LOL! wow.  a whole $47K and now you can quit your job?  must be a real high paying job if you can live on 47K for more than a few months!  i'm sure that kid picking his nose in the corner will be happy to get the additional 12 hours a week flipping burgers.

Crypto-World-Order's picture

Go easy on him tiger, hes 3x leveraged, armed and dangerous.

shizzledizzle's picture

In all fairness depending on the situation a feller could live a good while on $47k provided that they had no outstanding monthly payments and a few acres of farmland... I'm not getting that vibe though from someone 3X leveraged long though.

Crypto-World-Order's picture

Where I live, 47K wont even buy you 3 months.

actionjacksonbrownie's picture

I think it's more a case of HOW you live, rather than "where" you live.

Gold Burrito's picture

I'm surprised by the pushback regarding the early retirement extreme plan when it partly reflects the ethos of Zero Hedge/Fight Club - don't buy shit you don't need.  I'm also looking to follow the 4% rule and retire somewhere between 45 and 50.  If something happens, then you can always go back to work.   

Tejano's picture

"Where I live, 47K wont even buy you 3 months." Sucks to be you.

Silver Savior's picture

47k is a lot of money. I usually spend $1600 a month total. I would feel totally like a king sitting on that much money. All the rest of my family but one is in debt with no savings. 

shizzledizzle's picture

And when everyone is on the train is the moment it will de-rail. 

MaxThrust's picture

Donald, there are only two options.

1. Dont press for a raise of the  debt ceiling. Instead reduce cut chop government spending

2. Raise the ceiling and spend like a drunken sailor.

falak pema's picture

Like I said : the Duck begins where Reagan left off; Reaganomics on steroids.

"Ride that financial nuke baby"; shades of Dr Strangelove's final scene in this financial armageddon scenario! 

Yippee !

Anarchyteez's picture

Remember the guy at the bottom of the tanker in Water World?

"Oh, thank god!"

At this point,...whatever.

ronaldwilsonreagan's picture

It's Deja Vu all over again.

sunny's picture

What every one knows is probably wrong.  Every bearish pundit is predicting the end of civilization as we know it when the whole system crashes into an economic black hole.  Makes me think that won't happen.  Rather than a sudden collapse, with FED help, we will ooze slowly into a morass, death by a thousand dips.  We'll sinking slowly with every "correction" almost but not quite countered by the likes of Benny/yellen et al. 

CNONC's picture

You have it exactly right.  Slow grind down.  Living standards decline slowly, people adjust, the world adjusts, periodic crises like 2008 occur, but we all survive.  At some point, however, the political system ceases to be relevant to the new realities.  That is where I fear we are, and what I have prepared for.  Economic pain is coming, but it is survivable.  The political fallout is where the great, disruptive, danger is. 

TheSilentMajority's picture

OMG this stockman character getting paid a peso for every time he cries wolf?

DEMIZEN's picture

no worries, just print some more monies. it always works.

Lostinfortwalton's picture

1962 prices:

New House $12,550

Average Income $5,556 yr.

New Car $2,924

Rent $110 mo

Gas $0.27

Ivy League tuition $1,520 yr

 

So what, exactly, has all this annual currency inflation wrought?

 

Silver Savior's picture

I think I will gladly trade my smartphone and computers to go back to 1962. This right now is total utter bullshit.

darteaus's picture

Yeah, wait until people need to sit through the Dental treatments of 1962 - it will be BACK TO THE FUTURE!

saldulilem's picture

So all these treasure auctions lately - what are they if not borrowing?

hairball48's picture

I've been watching and reading David Stockman for his entire career. Y'all can laugh at Stockman, but he knows "the numbers" better than anyone alive. I believe he is correct. Get out the popcorn because this summer will be fun watching these assholes squirm in Washington.