Debt Ceiling

Whereas two days we presented what the Treasury's options are to extend the inevitable moment before the debt ceiling is hit (which , today Goldman's Alec Phillips analyzes another angle of the ceiling hike: what the congressional debate on the debt ceiling rise may look like. While everyone is certain that the ultimate fate of the debt target, pardon, ceiling issue is a given, and that the UST will end up hiking it by another $1.5 trillion, little has been said about just how we get there. From Goldman: "Split control of Congress is apt to lead to a longer-than-usual debate over increasing the statutory debt limit, and could result in at least one failed attempt at an increase before the limit is raised. It also looks possible if not likely that Congress could approve at least one short-term increase in the limit as the debate unfolds, the first such stopgap since 1996." Yet no matter what how heated any debates, the final outcome is certain, and at least according to Goldman, should be priced in: "Although the debate over the debt limit is likely to capture the market’s attention from time to time, the overall effect of the debt limit debate is apt to be modest. Looking back to the 1995-1996 episode, there is little evidence that the most important legislative developments in that period had an effect on Treasury yields." In other words, the US will continue issuing $125 billion in debt per month, while US GDP grows at one sixth this rate, confirming that the hyperinflationary toxic loop of failed monetary policy is beyond repair. That said, we agree with Goldman - the debt ceiling will be raised as the alternative will be another round of mutual assured destruction from everyone. The same thing is true for 2012, when the next debt ceiling hike will need to take place. Then in 2013, then in 2014, and after that the debt ceiling will be raised on a daily basis.

After in the past week, the blogosphere had been hobbled by one after another mindless oped claiming that the US can easily avoid default by just paying the interest on its obligations, and thus does not have to worry about the debt ceiling, we decided to put some sense to this debate when we pointed out that the "US Debt-to-Deficit Difference Hits Fresh Record, As Treasury Continues To Issue 50% More Debt Than Needed To Fund Deficit" meaning that i) it is not a debt ceiling, it is a debt target (© Lizzie363), and ii) the hundreds of billions of monthly obligations that are funded through debt, are "legal" obligations of the US government that have to be paid in full every month or a default will occur regardless. Neal Wolin, Deputy Secretary of the Treasury, has just released a statement on the Treasury's blog saying pretty much just that. Which, however is certainly not a good thing, as it merely confirms just how totally screwed this country is, and that absent a hike in the ceiling to $15.5 trillion (which we believe is where the debt ceiling will be through March of 2012 when it will be raised to $17 trillion), the dollar will be backed by several trillion in insolvent Federal Reserve Notes, er, assets (that should quickly end all debate about EUR-USD parity). It also confirms that Bernanke has no choice but to continue monetizing debt, through QE and to do that, he needs to make it palatable to the general public, which in turn will mean either a material economic deterioration, or, as the two are apparently identical in the Chairbeast's mind, the Russell 2000.

Just in case there was any confusion that congress (and its Wall Street superiors) almost work for the majority, but not quite, here is some additional evidence: "The U.S. public
overwhelmingly opposes raising the country's debt limit even though
failure to do so could hurt America's international standing and push up
borrowing costs, according to a Reuters/Ipsos poll released on
Wednesday. Some 71 percent of those surveyed oppose
increasing the borrowing authority, the focus of a brewing political
battle over federal spending. Only 18 percent support an increase." Yet somehow the market has already factored in that no matter what happens, Congress has no choice but to continue heaping on the debt, and following this week's auctions, the total should approach $14.1 trillion in debt, cutting the buffer by another $100 billion. Which is why expect to hear many more threats of untold destruction should Congress actually side with the supermajority for once.

As we predicted in September, the US, which is issuing debt at a clip of about $125-150 billion per month (in line with the Fed's monetization of every single newly printed dollar of debt), will likely hit its debt ceiling as soon as March. We finally get confirmation from none other than tax expert Tim Geithner, who in continuing his tirade of scaring the bejesus out of anyone dumb enough to listen to him , has just confirmed our concerns. Not only that, but he has also written a letter to Dear Mr. Leader Harry Reid in which he uses big and scary words to make it clear just how fucked this country is if it can not issue about $2 trillion in debt each and every year. Because the only way to avoid bankruptcy is, as Joe Biden once said, to issue way more debt.

Just out on Reuters, which notes that Tiny "TurboTax" Tim Geither says hitting the debt limit could have catastrophic economic consequences, potentially worse than impact of 2008-09 financial crisis. Bold/underline ours. Expect much more threats of total and complete annihilation unless the dumbest guys in the room get what they want.

Goldman's Alec Phillips has compiled a great docket of key events on the US fiscal calendar for the first half of 2011, of which easily the biggest wildcard is the initiation of the debate debt ceiling increase. While Zero Hedge believes that most of the rhetoric surrounding this issue is primarily of a polemic nature, with lots of ins, lots of outs, and most certainly lots of theater, the ceiling will be passed right on cue, by anywhere between $1.6 and $2.0 trillion: enough to fund the deficit for the next year and leave a small buffer. One thing is certain: discussion will most certainly not commence until as late as possible, which means sometime in late March, early April (as such we urge readers to aggressively sell the InTrade Feb 28 "debt ceiling" contracts).

The new year is finally here, which means the new composition of Congress and the Senate is now in play and tickets to another year of political theater are rapdily selling out. In the meantime, republicans are not wasting a single minute. Michigan Rep Fred Upton, who will lead the House Energy and Commerce committee, said today that he expects "significant" bipartisan support for a proposed repeal of the health care overhaul -- a vote he said would be held before President Obama's State of the Union address, reports Fox News. Politico chimes in: "We have 242 Republicans. There will be a significant number of Democrats, I think, that will join us. You will remember when that vote passed in the House last March, it only passed by seven votes." Of course, this is just more of the same theatrical BS that has made all of America sick and tired with the charade that is "democratic" governance. And wlsewhere, just to confirm that America's banana republic will be cemented in under three months, when Congress passes the debt ceiling to well over $15.5 trillion, Austan Goolsbee was heard advising America not to play chicken with the debt ceiling (i.e., to pass it to an arbitrary number with preferably one hundred zeroes). The alternative to not increasing the ceiling is per Goolsbee, in true kleptocrat fashion, untold misery and destruction.

As usual, trust Rosie to cut through the chaff regarding the $858 billion tax package, which he views not as stimulative, contrary to what the suddenly bullish sell-side crew claims, but merely as preventing the government becoming a "contractionary economic force" - "How much
of the tax cuts will go into saving and imports remains to be seen. We think the “stimulative” effects are over exaggerated." Specifically, his trade recommendation based on a paralyzed congress and a debt ceiling hike is as follows: "by the time the second quarter rolls around, it will be time to buy volatility, S&P 500 puts, and gold." And in further debunking the perpetually wrong sellside groupthink, Rosenberg looks at bond forecasts from late 2009 and finds that virtually everyone who is now once again calling for a drop in yields was doing the same a year ago...and was wrong. The tangent is that if Morgan Stanley's Jim Caron is completely wrong for the second year in a row, we fail to see how the rates strategist can possibly claim to have credibility should he get this most important call wrong in two consecutive years. Lastly, for those who care about market fair values, Rosie shares his fair value model updates on the S&P, the TSX, Corporate bonds and the CAD.

The Treasury has announced $72 billion in coupons to hit the Primary Dealers POMO churn accounts, just as expected. The breakdown is as follows: November 8: $32 Billion in 3 Years; November 9: $24 Billion in 10 Years; November 10: $16 Billion in 30 Years. Now what is interesting is that while the rate of coupon (and bill) issuance will certainly not decline, we now know that even according to the UST, it will in fact accelerate, and hit $700 billion net over the next 5 months. And as we calculated a few days ago, this means that the US Debt ceiling of $14.3 trillion will be breached. Which puts such Tea Partiers as Rand Paul in a sensitive position. In fact, last night as MSNBC highlighted, at the next debt ceiling raise vote, Paul may be able to filibuster the vote (something MSNBC seems to disapprove of, and a vote that had no problems passing last time it was cast in late 2009) which will result in essentially what is a default of the US. Of course, it is much easier to simply do away with the debt ceiling travesty altogether as even the CBO has confirmed that the US will need to raise at least $10 trillion in debt over the next decade. So why continue pretending America no longer live Primary Dealer sticksave auction to auction?

The US Treasury has just released its revised debt issuance/funding schedule for the Q4 as well its fresh estimates for Q1 2011 borrowing needs. While much of this will certainly be re-revised as it will likely soon become a function of massive QE2 driven demand than supply, as of today, the Treasury is expecting that it will have $362 billion in net marketable issuance in the current quarter (as cash balances decline by $10 billion), although the kicker is next quarter, where the Treasury now anticipates the issuance of $431 billion, in addition to a cash decline of $30 billion, implying over a $460 billion change in net debt levels. Now for some back of the envelope math: with the UST having already issued $97 billion in debt in October (per DTS), it means that Geithner anticipates issuing $265 billion in November and December. It also means that $431 billion has to be issued in January through March of 2011. Furthermore, as the most recent cash balance was $18.4 billion (ex SFP), this number will need to be replenished to $70 billion by March 2011, implying the need of another ~$52 billion in incremental debt funding. Altogether this means that roughly $750 billion in additional debt will have to be issued over the next 5 months. And since the most recent number of total debt subject to the ceiling was $13.609 trillion, adding $748 billion to this number results in $14.357 trillion. Which just happens to be $63 billion more than the recently revised debt ceiling of $14.294 trillion. Thus the US debt ceiling will have to be revised higher one more time, most likely in February or March of 2011.

The Treasury has just released its most recent quarterly borrowing estimate for fiscal Q4 2010 and Q1 2011 (or the next two quarters in normal speak). The government now anticipates a funding need of $350 billion and $380 billion in the next two quarters. While the $350 billion number is a slight reduction from the prior estimate of $376 billion, historically the Treasury has been unduly and overly optimistic in determining its debt issuance requirements. With the June 30 total debt balance of $13.203 trillion, it means the Treasury itself now anticipates total debt at just under $14 trillion (or $13.93 trillion to be precise). This equates to about $13.88 trillion in debt subject to limit (which at last check was $14.3 trillion). Looks like the Treasury will not need to raise the debt ceiling before the midterm elections after all: perhaps this is what the market is celebrating today: nothing less than the latest and greatestexample of news slightly better than a worst-case scenario. We also learn that, "during the April - June 2010 quarter, Treasury issued $344 billion in net marketable debt, and finished the quarter with a cash balance of $290 billion, of which $200 billion was attributable to the SFP. In May, Treasury estimated $340 billion in net marketable borrowing and assumed an end-of-June cash balance of $280 billion, which included an SFP balance of $200 billion. The increase in the cash balance related to higher net cash flows and net marketable borrowing." And with every new auction pushing the US debt further higher into "never repayable"territory , the Bid To Cover grows ever higher. And in fact, don't look now, but the last time the market was at 1,125, the 10 Year was just 45 bps higher than the current 2.96%, confirming that all is perfectly illogical with the world.

In case one is wondering why the House Democrats attached a document to the emergency war supplemental bill that "deemed as passed" a non-existent $1.12 trillion budget, which basically allows the ruling party to start spending money for Fiscal Year 2011 without the constraint of an actual budget, here is the answer: on June 30, the US closed the books with just over $13.2 trillion in total debt, an increase of $210 billion in one month, or $2.5 trillion annualized. There is just $1.1 trillion left on the ceiling. As we have long been warning, at the current run rate, the ceiling will be breached in under six months, or just around November 2. More disconcerting is that the monthly debt roll continues to be in the "ridiculous amount" category, hitting a total of $660 billion, of which $583 billion was rolling off Bills (we are not sure what the $19 billion im "GSE investment" was for, but we are fairly sure the words Ponzi and Perpetuation are part of it). Of course, if America knew that according to the Obama non-existent budget the debt ceiling would be breached in 2010, it may not have a favorable reception among those few who are still willing to vote for either party of the bipartite farce that passes for a government.

Just in case some people forget what the trade off to the market melt up is, today we are starting a periodic daily report of the Treasury's total debt subject to the statutory limit. Today's total: $12,607,140,000,000. We started March at $12,383,717,000,000. We started the fiscal year (October 1) at $11,853,434,000,000. We have added $223 billion of debt in the last three weeks, and $755 billion in just 5 months. As a reminder, the debt limit is $14.3 trillion. We are $1.7 trillion away from the limit. At March's run-rate of about $300 billion per month, the debt ceiling will be breached by October 2010. If somehow the government manages to reduce the monthly issuance to "just" $200 billion, we have eight and a half months until breach, or January 2011.

Congress Democrats have just signed off on the US hitting 100% debt/GDP. About 140% if one adds GSE liabilities which also should be on the budget.

A mere three hours before the Bernanke cloture vote, America just got permission to hit 100% Debt/GDP. Thank Senate Democrats who just approved an amendment increasing the US debt ceiling by $1.9 trillion. The 60/40 vote was across party lines and only successful because Republican Sen.-elect Scott Brown has yet to be seated.