US Debt-to-Deficit Difference Hits Fresh Record, As Treasury Continues To Issue 50% More Debt Than Needed To Fund Deficit

Today, the US Treasury department disclosed that its August deficit was a slightly better than expected $90.5 billion, compared to $103.6 billion in the year prior. What received less fanfare was that the comparable increase in debt in the month of August 2010 was $212 billion, compared to $143.6 billion a year earlier. In other words, more than twice the the deficit had to be issued in the month of August. In an angry post, Karl Denninger highlighted this earlier. Of course, this is not a new development. As we highlighted in May, the US Treasury department continues to issue debt well in excess of the monthly deficit. When we conducted our analysis initially, the average debt issued over any given period's deficit was $34 billion (beginning in October 2006). To be sure, this number has increased to an average of over $35 billion when taking into account the last few months' data. In other words, over the past 47 months, or almost 4 full fiscal years, the US has accumulated a $3.3 trillion deficit, while over the same period, total Federal debt increased by $4.9 trillion, from $8.6 trillion to $13.4 trillion.

What many pundits have yet to realize is that on average the US issues exactly 50% more debt than it needs to merely fund its deficit: whether the difference goes to fund intertemporaral differences in short-term debt maturities is irrelevant: the point is that the $10 trillion in deficits over the next 10 years, will most surely result in at least $15 trillion of new debt. We say at least, because if interest rates pick up, the US will have to issue more and more debt just to fund interest payments. Incidentally, this month 8% of all tax revenues went to fund interest expense: this is an increase from the roughly 5% spent on interest outlays in early 2010. Already the trend of interest funding is one of increase, and rates are still near record all-time lows. Just wait until the 10 Year is back at 5-6%.

The variation between the monthly deficit and the actual debt funding can be seen on the chart below: while the increase in the blue line is to be expected (and feared - as it shows the government has lost all control over government spending), it is the much faster rate of increase in the red line which is what politicians (and Chinese investors) should be much more concerned about.