Budget Deficit

The economic collapse is not a single event.  The economic collapse has been happening, it is is happening right now, and it will continue to happen.  Yes, there will be times when our decline will be punctuated by moments of great crisis, but that will be the exception rather than the rule.  A lot of people that write about "the economic collapse" hype it up as if it will be some huge "event" that will happen very rapidly and then once it is all over we will rebuild.  Unfortunately, that is not how the real world works.  We are living in the greatest debt bubble in the history of the world, and once it completely bursts there will be no going back to how things were before. But other than that, everything is rainbows and lollipops, right?

While the rest of the developed world is scrambling here and there, politely prodding its central bankers to destroy their relative currencies, all the while naming said devaluation assorted names, "quantitative easing" being the most popular, here comes Venezuela and shows the banana republics of the developed world what lobbing a nuclear bomb into a currency war knife fight looks like:

VENEZUELA DEVALUES FROM 4.30 TO 6.30 BOLIVARS
VENEZUELA NEW CURRENCY BODY TO MANAGE DOLLAR INFLOWS
CARACAS CONSUMER PRICES ROSE 3.3% IN JAN.

And that, ladies and gents of Caracas, is how you just lost 46% of your purchasing power, unless of course your fiat was in gold and silver, which just jumped by about 46%. And, in case there is confusion, this is in process, and coming soon to every "developed world" banana republic near you.

Yesterday we had our 15 minutes of fun with the CBO's latest budget forecast, which, while wrong as always, provided the mainstream media with its dose of propaganda optimism, by "forecasting" that the baseline 2013 budget deficit will be some $845 billion, well below the $1+ trillion deficit in 2012 (and quite a bit above the CBO's last year 2013 deficit forecast of $585 billion). It will be higher. And we know that not only because the CBO is a complete and utter failure when it comes to predicting the future (which as Rajoy would say would be "just as forecast, except for everything that does happen"), but because earlier today the Primary Dealers that make up the Treasury Borrowing Advisory Committee (a topic we have written extensively about in the past), released their own 2013 budget deficit forecast. The picture there is far less optimistic: the median estimate is some $929 billion, however it is the upside range that is where reality lies, and this number is, according to the likes of Goldman and JPM (who head the TBAC) as well as the 18 other Primary Dealers, as high as $1.037 trillion.

We won't spend any time discussing the accuracy of the "impartial" Congressional Budget Office: we already did that in August 2011 when we showed that back in 2001 the CBO forecast total 2011 public debt would be negative $2.4 trillion; instead the real number was positive $10.4 trillion, a delta of only $12.8 trillion. We also won't spend much time on the just released CBO headline grabbing projection that the 2013 budget deficit will be under $1 trillion, or $845 billion to be precise. Instead we will show the progression of the CBO's baseline forecasts for the period 2012 and onward. We will also note that the now-forecast 2013 budget deficit of $845 billion was supposed to be a deficit of just $585 billion one short year ago, a token 40%+ error rate, but in the immortal words of Hillary Clinton: "who cares." Of course we should note that if we apply the same forecast error to the 2013 budget, it means the real final deficit print will be $1.2 trillion - just a tad more realistic. Finally, we will certainly note that while the CBO believes 2013 may see the first sub $1 trillion deficit in 4 years, a number which will decline modestly in the coming years, the deficit then proceeds to grow and grow and grow, until we reach 2024, at which point the US deficit returns to $1 trillion once again... and never gets smaller. And this is the optimistic version.

When the Republican party agreed last week to a push back on the debt ceiling discussion by three months to May 19, virtually without a fight in a move that may presage what is set to become a quarterly can kicking exercise on the US credit card max, some were curious what the quo to this particular quid may be. Earlier today on Meet the press Paul Ryan explained: the pound of spending flesh demanded by the GOP in exchange for caving on yet another key GOP hurdle is, as our readers have known for over two weeks, the Sequester, which is set to hit on March 1 and possibly the stop-gap government funding on March 27, after which various government agencies will start shutting down. Both programs are set to kick in automatically as incremental spending cuts, chopping away even more basis points from the 2013 US GDP, unless the GOP votes affirmatively to extend them in what would then be seen as a move that destroys any last trace of leverage and credibility that GOP may have had.

The budget debate is bullshit, what matters is the Debt to the Public.

As reported previously, not only are there currently US boots on the ground in the latest geopolitical "anti Al-Qaeda" snafu in Mali, but it turns out a US presence had been secretly in place for many months prior to the recent escalation in French-led hostilities against the western African nation. And while this would likely have opened up numerous media inquiries under any other administration, so far these has been zero interest as to just why the US is "assisting" the French in this latest military deployment of military forces outside of the US: after all, one of the biggest complaints about US spending is that so much of it goes for military purposes (ignoring that all the tax revenues can't even cover just the monthly entitlement spending of the nation). Perhaps one reason is that, at least to date, the general consensus was that since the French operation in Mali is spearheaded and organized by the French, it is also funded by them. As it turns out that is not the case. As Reuters reports, "The U.S. military has flown five C-17 cargo sorties into the Malian capital to help bring a French mechanized infantry unit into the fight against al Qaeda-affiliated militants in the north of the country, Pentagon officials said on Tuesday." But surely the French are paying for these sorties which are there only to help the French, right? Wrong. "Little said the United States had decided not to seek compensation or reimbursement from France for the flights." Luckily, the US is in such a healthy financial position it can afford to not only open one more front in the war against "Al Qaeda", but will sign for the French tab too. With Joe Sixpack's money of course.

• "My adversary is the world of finance."
• "I don't like indecent, unearned wealth."
• "We do not believe that in this country, freedom is reserved for the lucky, or happiness for the few."
• "We cannot succeed when a shrinking few do very well and a growing many barely make it."
• "People from all backgrounds and political positions are willing to contribute for services and protection of society as a whole - but on the condition that money is being spent effectively and that everyone is paying their part."
• "We find ourselves in a difficult situation... There's a crisis, weak growth, unemployment... my duty is to ensure that by the end of my mandate (the country) is in a better state than it was at the beginning."

From Goldman Sachs: "Allowing the sequester to hit would, in our view, have greater implications for growth than a short-lived government shutdown, but would not be as severe as a failure to raise the debt limit. Although Republicans in Congress generally support replacing the defense portion of the sequester with cuts in other areas, there is much less Republican support for delaying them without offsetting the increased spending that would result." And in bottom line terms: "Sequestration would reduce the level of spending authority by $85bn in fiscal year (FY) 2013 and $109bn for subsequent fiscal years through 2021. The actual effect on spending in calendar 2013 would be smaller--around $53bn, or 0.3% of GDP--since reductions in spending authority reduce actual spending with a lag. The reduction in spending would occur fairly quickly; the change would  be concentrated in Q2 and particularly Q3 and could weigh on growth by 0.5pp to 1.0pp." In other words: payroll tax eliminates some 1.5% of 2013 GDP growth; on the other side the sequester cuts another 1%: that's a total of 2.5%. So: is the US now almost certainly looking at a recession when all the fiscal components to "growth" are eliminated? And what will the Fed do when it is already easing on "full blast" just to keep US growth barely above 0%?

The debt limit was formally reached last week, and we expect the Treasury's ability to borrow to be exhausted by around March 1 (if not before) and while CDS are not flashing red, USA is at near 3-month wides. Like the previous debt limit debate in the summer of 2011, the debate seems likely to be messy, with resolution right around the deadline. That said, like the last debate we would expect the Treasury to prioritize payments if necessary, and Goldman does not believe holders of Treasury securities are at risk of missing interest or principal payments. The debt limit is only one of three upcoming fiscal issues, albeit the most important one. Congress also must address the spending cuts under sequestration, scheduled to take place March 1, and the expiration of temporary spending authority on March 27. While these are technically separate issues, it seems likely that they will be combined, perhaps into one package. This remains a 'very' recurring issue, given our government's spending habits and insistence on its solvency, as we laid out almost two years ago in great detail.

If anybody should be labeled a lunatic, it should be the Democrats and those that are encouraging these unsound financial spending policies.

Two weeks ago, when we commented on the biggest farce in financial thinking at the time (promptly replaced by the even more lunatic platinum coin "idea"), namely that one of the main "spending cut" proposals of the Obama administration, one amounting to $290 billion, was the assertion that the US will save hundreds of billions because, get this, interest rates are now lower than they were before. We commented as follows: "this is where one's Excel refs out, because the interest payment on Treasurys, at least in a non-banana republic, one set to see 120 debt/GDP in 3-4 years, is a function of fiscal decisions (central-planning notwithstanding), and to make the idiotic assumption that one can control interest rates for 10 years (central-planning notwithstanding), just shows what a total farce this whole exercise has become, and also shows that nobody in the administration, or the GOP for that matter, has even modeled out the resultant budget pro forma for the proposed tax hikes and budget "savings" as that would blow up said excel model immediately." We now learn that one other entity that did not fully model out the last minute Fiscal Cliff deus ex, and especially not the recursive debt relationship in a country where half the government spending is funded by debt, is the always amusing CBO (whose epic prediction failure rate has been discussed here on numerous occasions). It appears that they just did, after the close, on Friday. The outcome? Their initial estimate of a $4.0 trillion budget increase was wrong and when one factors in the fact that this incremental spending would have to be funded by, you guessed it, debt, debt which has interest, the full impact of the Obama tax cut rises deficits by 15% to $4.6 trillion over the next decade.

Oops.

When it comes to the main sovereign story of 2011 and 2012, namely the endless bailout of Greece, now in its third iteration, the conventional wisdom is that courtesy of the near elimination of the country's private sovereign debt and the fact that its official foreign debt held by benevolent taxpayer funded globalist powers (IMF, ECB, EFSF) has been mostly converted into a zero-coupon, perpetual piece of paper, the country is fine. After all it has no debt interest expense to finance, and the only shortfall it has to plug is that created by its primary budget deficit (which as we showed earlier is "improving" on a year over year basis not because the economy is improving, but because the Greek government is simply refusing to pay its bills). So there is nothing more to do but sit back and wait while the economy slowly recovers, the unprecedented internal imbalance with Germany is gradually aligned, are the unemployment rate drops, (while hoping that the population does not die out first) right? Wrong.   Moments ago Kathimerini reported that in 2012, the amount of non-performing loans has exploded by a laughable amount, rising some 50% from December 2011, when it was "only" 16% and stood at 24% last month. And therein lies the rub, because as Kathiermini prudently notes, the "bad loans come to a considerable 55 billion euros. This means that the sum of NPLs already exceeds the total funds set aside for the recapitalization of the local credit system, which amounts to €50 billion."

Oops.

Moody's has stepped forward with the first warning shot across the bow that:

• *MOODY'S: MORE MEDIUM TERM ACTIONS MAY BE NEEDED TO SUPPORT Aaa

Has contradicted itself (from September) on the debt-ceiling breach; and warns that while the deal 'mitigates' some fiscal drag, it does not remove it. To wit: the IMF piles on:

• *IMF SAYS `MORE REMAINS TO BE DONE' ON U.S. PUBLIC FINANCES
• *IMF SAYS U.S. DEBT CEILING SHOULD BE RAISED `EXPEDITIOUSLY'

Full statements below.

Curious how Europe's insolvent peripheral countries, where the government is increasingly the only source of demand (if not funding), have managed to avoid falling into a primary budget deficit abyss? Simple: instead of paying their outstanding bills, Europe's insolvent nations are simply not paying them. And with the entire European bond market now a central bank controlled policy mechanism, meaning there are no longer any checks and balances to keep governments honest, there is no pressure on said countries to actually pay. Hopefully those companies on the other end of these unpaid invoices have as generous a benefactor as the ECB to fund their now persistent and growing undercapitalization.