Tim Geithner

"if you don't ask the most fortunate Americans to bear a slightly larger burden of the privilege of being American, then the only way to achieve fiscal sustainabilty is through unacceptably deep cuts"

And not because his Rule doesn't have teeth.

Today the US Treasury quietly and efficiently auctioned off enough debt to satisfy nearly 20% of the entire second Greek bailout funding needs (thank you repo markets and multi-trillion repo custodians BoNY and State Street). Tim Geithner just sold $32 billion in 2 year bonds at a rate of 0.31%, right on top of the When Issued, which was the highest yield since August 2011, yet nothing too dramatic. Since this is the short end of the curve where Bernanke is fully in control, the range in recent auctions has fluctuated from 0.222% to 0.31%. Yet as noted last week, the biggest "beneficiary" of short-end purchases have been Primary Dealers - are they starting to choke on thier holdings? And who will they sell to this paper which yields absolutely nothing. The auction internals were a snooze - the Bid To Cover was 3.54, a drop from January's 3.75, but higher than the TTM average of 3.42. Dealers took down 54.66%, in line with the average, Indirects left holding 35.84%, and 9.5% for the direct. Overall, nothing to write home about, and the bottom line is that the US just added another $32 billion to its net debt of $15.413 trillion, or a new record high debt/GDP ratio of 101%. It is going much higher.

The task of the financial/political/media Status Quo is to convince Americans to overlook the abundant evidence of economic deterioration and focus on heavily juiced "evidence" of robust "growth." The game plan is this: if the Status Quo can convince you that the economy has righted itself and from here on in everything will get better and better, every day and in every way, then we will abandon financial rationality and start buying homes we can't afford on credit, cars we can't afford on credit and boatloads of stuff from China that we don't need on credit (of course looking cool is a "need," i.e. having an iPad to carry around). In other words, believing it is so will make it so. That is the essence of the campaign to stimulate "animal spirits" confidence: though the economy is actually tanking, if they can only convince us the Dow is moving to 15,000 and then on to 20,000, jobs are being created left and right and things are looking up everywhere, then the resulting piranha-like shopping-feeding-frenzy will create the expansion that is currently chimerical.

Hubris is at the heart of this. Everyone says this cannot happen – we won’t allow it. Says who? The EU says: if it is written in an agreement, it must be totally correct, unchangeable, and followed at all costs. New realities can’t intervene and no slippage is allowed. Why the Germans are so sure that they know the future is beyond me. They are fallible too, but they won’t admit it, and the Greeks can’t make them budge. Haven’t they looked around? Santorini has a different economic and social cost structure than Wiesbaden. Humanity (and common sense) seems totally lacking in the negotiations with the Greeks and a violent backlash would be totally understandable. Why the countries that have been fattening up their current account surpluses selling products to Greeks, whom they should have known were basically broke – just as they always have been – should be paid 100% on the euro is beyond me. Major losses should apply not only to sovereign borrowings but also to accounts receivable for cars, electronics, and other consumer goods. The market has not opened its eyes to the impact this Greek unraveling will have. The Eurozone will be mortally wounded and the world will suffer a significant recession – maybe as deep as 2008. European banks will lose much of their capital base and many should be bankrupt, but just as in the Lehman aftermath, the governments will try to save the banks and the banks’ bondholders, solvent or not. As the bank appetite for Eurozone sovereign paper will be decimated, austerity will probably follow shortly, followed by deflation and uncontrollable money creation. The European recession should be one for the record books.

In light of the epic fiasco from last August, when the US debt ceiling hike became a 2 month televized affair, culminating with the GOP caving, but not before the S&P downgraded the US (and in the process breaking the US stock market), Zero Hedge has long been analyzing the chronology of future debt breaches, as with the presidential election in November, what happens in the months and weeks ahead of it as pertains to the number one problem facing America - its lethal debt addiction - will be by far the biggest weakness of Obama's campaign. This is something we believe the GOP has finally understood, and they want a full replay of last August's insanity, to remind America just how broke (and broken) this country is. Yet it turns out all of our analyses have been for naught (if 100% correct). Because it is none other than President Barack Obama who has been kind enough to point out, that on September 30, 2012, or in just over 7 months, total US debt subject to the limit will be, wait for it, $16,333,900,000,000. Why is this an issue: because the final debt ceiling that Obama has been afforded with automatic Senatorial roll overs (even as Congress theatrically votes these down), is $16,394,000,000. In other words, with two months ahead of the election, the US will have a de minimis $60 billion in debt capacity. And since the implied burn rate is $133 billion/month this means that the United States will be in full blown debt ceiling hike chaos just as the final electoral debates take place. And one wonders why the GOP rushed to green light Obama an additional $160 billion in debt issuance. If indeed the $160 billion in new debt is added, the US may not even last to September before Tim Geithner is forced to start plundering G-fund and other retirement accounts. It also means that two months of America in a debt ceiling breach situation will deal a dramatic blow to Obama's reelection chances as the last thing the US population will want is a replay of last summer.

The last week has offered an amusing display of the difference between the cheerleading corporate mainstream media, lying Wall Street shills and the critical thinking analysts. What passes for journalism at CNBC and the rest of the mainstream print and TV media is beyond laughable. Their America is all about feelings. Are we confident? Are we bullish? Are we optimistic about the future? America has turned into a giant confidence game. The governing elite spend their time spinning stories about recovery and manipulating public opinion so people will feel good and spend money. Facts are inconvenient to their storyline. The truth is for suckers. They know what is best for us and will tell us what to do and when to do it....  The drones at this government propaganda agency relentlessly massage the data until they achieve a happy ending. They use a birth/death model to create jobs out of thin air, later adjusting those phantom jobs away in a press release on a Friday night. They create new categories of Americans to pretend they aren’t really unemployed. They use more models to make adjustments for seasonality. Then they make massive one-time adjustments for the Census. Essentially, you can conclude that anything the BLS reports on a monthly basis is a wild ass guess, massaged to present the most optimistic view of the world. The government preferred unemployment rate of 8.3% is a terrible joke and the MSM dutifully spouts this drivel to a zombie-like public. If the governing elite were to report the truth, the public would realize we are in the midst of a 2nd Great Depression.

Just a matter of when?

Remember when the US hiked its debt ceiling on Friday courtesy of a formulaic 52 affirmative votes in the Senate, giving the Treasury $1.2 trillion in dry debt powder to attempt to grow the economy one more time according to the algorithmic fantasies of voodoo priests with pieces of Ivy League parchment on their walls? Well, two days later, the dry powder is less than $1.1 trillion. In other words, in the past two days, total US debt increased by $120 billion, along the lines of our expectations, as the Treasury filled up all the G-fund cash it had pillaged to continue issuing debt throughout the month of January even though it was formally above the debt ceiling. What is more concerning, is that as the chart below shows, the trendline of US debt since the beginning of 2011 is no longer a straight line, but has slowly transformed into a parabola, the very same word used as the root in such other infamous words as, for example, parabolic.

As a follow up to today's must read letter from Bill Gross, the PIMCO head explains what was the thinking behind the conclusion that is slowly leading him to become a gold bug, the potentially erroneous assumption that the Fed can not drop rates below zero (not if Goldman and JPM have their way), why Bernanke has no choice but to write checks when the Twist ends in June which will lead to bond buying for the next 12-24-36 months. Nothing new. What is new, and absolutely stunning, is Gross' endorsement for president: 'I'm a little Ron Paulish." (6'24" into the clip)... That's right. The bond king endorses Ron Paul for president, apparently on the realization that very soon he will have to pay Tim Geithner for the privilege of holding hundreds of billions in US paper. And now we've heard it all.

Two days ago, the US Treasury announced that for the Q2 fiscal quarter (January - March), the net borrowing need of the US would be $97 billion lower than its previous estimate, coming in at $444 billion for the three months (still a $115 billion monthly run rate, not nearly enough to last until the end of the year with the current debt ceiling capacity, and likely not even through the election). What the Treasury did not specify is where this incremental cash would come from, merely noting that the higher cash balance which it ended December 2011 with compared to estimates "was driven primarily by higher-than-projected receipts and lower outlays" implying that the Treasury was confident higher than expected tax receipts would continue.  There is however one problem with this: as the attached chart from the just released Q1 fiscal report from the Office of Debt Management shows, withheld taxes, the primary source of US government revenues, has just rolled over and is now posting negative Year over Year numbers (chart 1). Which is bad news for Tim Geithner if he hopes that the spike in tax receipts will continue, and for the TBAC which projects a lower than expected funding needs: in fact we are confident that the net issuance in Q2 will be substantially greater than the net forecast, and will likely be funded with short-term Bills, either ad hoc, or in the form of increased program Cash Management Bills issuance. Yet the fact that America can not live within its means is not news. What however, needs addressing is why, as Chart 2 shows, have US corporate taxes never regained their historical levels from 2007, when as is well-known, corporate profits have never been higher (if now rolling over finally), and corporate cash, especially that held off shore, at record levels? Because as the green line shows, the 12 month moving average of corporate income taxes, has barely budged from the recession lows. We wonder why nobody has asked the question: why is this the case and why have neither politicians nor individual taxpayers made an issue out of this yet?

Earlier today, the New York Fed was kind enough to voluntarily disclose the finacial holdings and assets of one former Goldman Sachs employee, and current FRBNY president Bill Dudley. Bill Dudley is also known as the gentleman to have received, when he was stil head of the PPT, aka the Fed's Open Markets Group, a waiver signed by one Tim Geithner on September 19, 2008, allowing him to keep not only his investment in AIG, which was "de minimis" at $1,200, but also in General Electric, which was not de minimis at $106,830. And while his modest holdings of AIG likely did not impact Dudley's protocol of bailing out the failed insurer, his interest in GE, and thus its then fully held subsidiary NBC Universal, parent of such comedy channels as CNBC, could potentially have been a source of conflict. Which is why the Fed has disclosed the full holdings of Dudley as of the 2008 year, in which we find that the bulk of Dudley's net worth was held by JPMorgan Chase Deferred Income Benefit Award (over $1MM) and JPM Chase Deferred Compensation ($500,001-$1,000,000). Was Mr. Dudley also completely conflict free vis-a-vis the bulk of his holdings, and their custodian, and did the New York's Fed largesse to bail out JPM among many others, have anything to do with this particular heretofore unknown detail? Of course not. After all, Jon Corzine is a free man. In other news, anyone who needs urgent access to the discount window or a $1 trillion overnight loan at 0.001% interest, should just call the Fed's 24/7 hotline: 877-52-FRBNY.

Yesterday we asked rhetorically if Ben Bernanke has become the gold bug's best friend courtesy of his FOMC announcement which led to a surge in gold, and a kneejerk whimper in stocks, which has now been completely wiped out courtesy of a subpar GDP number. Today we note that it is not only the Fed, but the US Treasury, and specifically the ravenous Mr. Geithner, who just got a green light to issue another $1.2 trillion in debt, and bring total debt to $16.4 trillion, which would still be 107% of today's GDP (which we don't see growing much if at all over the next year), that can be added to the list of best Goldbug friends. As the chart below demonstrates quite vividly, in addition to global and local monetary expansion, the price of gold tends to correlate quite well with the US debt ceiling. Which means that per yesterday's Senate 52-44 vote authorizing Timmy to go hog wild (which in turn means that Bernanke will have to step in and monetize much of this new debt issuance), the price of gold just got a green light for at least $250 in upside - the implied price just got raised to $1960. Of course, anyone who thinks the US will stop issuing debt there needs a brain MRI stat. Thank you Senate. And thank you Timmy. And, of course, thank you Ben.

Which is why we were delighted that after months of modest confusion on the topic, the Congressional Committee on Financial Services (including subcommittee chairman Ron Paul), have demanded that not only Geithner make his stance on a US-funded IMF bailout of Europe crystal clear, but that they are openly opposed to "American taxpayer dollars being used to bail out Europe...through additional contributions to the IMF." We are curious to see just how Geithner will weasel his way out of responding to this: perhaps the only logical stall tactic is to reply that he will be busy helping Mitt Romney in his tax "revisions" over the next several months.

All you need to read.