US Budget Deficit Hits $600 Billion In 6 Months, As Spending On Interest Explodes

The US is starting to admit that it has a spending problem.

According to the latest Monthly Treasury Statement, in March, the US collected $210.8BN in receipts - consisting of $88BN in individual income tax, $98BN in social security and payroll tax, $5BN in corporate tax and $20BN in other taxes and duties- a drop of 2.7% from the $216.6BN collected last March and a clear reversal from the recent increasing trend...

... even as Federal spending surged, rising 7% from $392.8BN last March to $420BN last month, the second highest monthly government outlay on record...

... where the money was spent on social security ($85BN), defense ($58BN), Medicare ($75BN), Interest on Debt ($33BN), and Other ($170BN).

The resulting surge in spending led to a March budget deficit of $208.7 billion, far above the consensus estimate of $186BN, and over 18% higher than $176.2BN deficit recorded a year ago. This was the biggest March budget deficit in US history.

The March deficit brought the cumulative 2018F budget deficit to over $600bn during the first six month of the fiscal year, or roughly $100 billion per month; as a reminder the deficit is expect to rise further amid the tax and spending measures, and rise above $1 trillion, although at the current runrate it is expected to hit $1.2 trillion. As we showed In a recent report, CBO has also significantly raised its deficit projection over the 2018-2028 period.

But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently surpassed $21 trillion, but to the interest on that debt, in a time of rising interest rates.

As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high in Q4 2017. That's when Fed Funds was still in the low 1%'s. What happens when it reaches 3% as the Fed's dot plot suggests it will?

In a note released by Goldman after the blowout in the deficit was revealed, the bank once again revised its 2018 deficit forecast higher, and now expect the federal deficit to reach $825bn (4.1% of GDP) in FY2018 and to continue to rise, reaching $1050bn (5.0%) in FY2019, $1125bn (5.4%) in FY2020, and $1250bn (5.5%) in FY2021.

Revising Our Deficit and Debt Forecasts


Goldman also notes that it expects that on its current financing schedule the Treasury still faces a financing gap of around $300bn in FY2019, rising to around $750bn by FY2021, and will thus need to raise auction sizes substantially over the next couple of years to accommodate higher deficits.

What does this mean for interest rates? The bank's economic team explains:

The increase in Treasury issuance and the ongoing unwind of QE should put upward pressure on long-term interest rates. On issuance, the economic research literature suggests as a rule-of-thumb that a 1pp increase in the deficit/GDP ratio raises 10-year Treasury yields by 10-25bp. Multiplying the midpoint of this range by the roughly 1.5pp increase in the deficit due to the recent tax and spending bills implies a 25bp increase in the 10-year yield. On the Fed’s balance sheet reduction, our estimates suggest that about 40-45bp of upward pressure on the 10-year term premium remains.

And here a problem emerges, because while Goldman claims that "the deficit path is known to markets, but academic research suggests these effects might not be fully priced immediately... the balance sheet normalization plan is known too, but portfolio balance effect models imply that its impact should be gradual" the bank also admits that "the precise timing of these effects is uncertain."

What this means is that it is quite likely that Treasurys fail to slide until well after they should only to plunge orders of magnitude more than they are expected to, in the process launching the biggest VaR shock in world history, because as a reminder, as of mid-2016, a 1% increase in rates would result in a $2.1 trillion loss to government bond P&L.

Meanwhile, as rates blow out, US debt is expected to keep rising, and  somehow hit $30 trillion by 2028...

... without launching a debt crisis in the process.

Comments

J S Bach Government nee… Thu, 04/12/2018 - 18:01 Permalink

Sorry if you don't like my take on affairs, GN.  I understand how I must seem "obsessed" sometimes with the ((())).  It's not an obsession with (((them))).  Rather, it is an obsession with the truth.  And, in my humble researches, the woes of our fiat fractional reserve system can be traced to one cabal of global banksters.  They have held sway over international trade and central banking since the inception of the UK's "Bank of England" set up by the Rothschild's over 300 years ago.  From there, the trail leads inexorably to our Federal Reserve System owned and controlled by the same (((clique))).  Again, I'm sorry if you're offended by this truth.  One cannot discuss any kind of solution to these problems without addressing their source.

In reply to by Government nee…

withglee J S Bach Thu, 04/12/2018 - 15:29 Permalink

"If our money were debt-free, this would be irrelevant. "

To talk of a debt-free money is to talk of a non-existent money.

Money is "an in-process promise to complete a trade over time and space." It is created by traders, and only by traders, like you and me making time spanning promises to deliver. Obvious examples are house and automobile purchases made by monthly payments. Money is "never" created by banks. Money created by governments is counterfeit.

Money has always been as I describe, regardless of how mismanaged it is. Give me a single example (outside of counterfeiting) where the money involved is "not" created by traders. Precious Metals are not money. As soon as you accept them in trade, the trade is completed on-the-spot.

Hint: Government is just a trader like you and me. But government perpetually rolls over it's promises ... and that is default ... purposeful default is counterfeiting.

Get it??

In reply to by J S Bach

fx new game Fri, 04/13/2018 - 04:38 Permalink

Thank god, Trump vowed to reduce the deficits in virtually each and every election speech. he seems to be winning relentlessly on that front, too.

And mind you, all those deficit projections for 2019 and beyond do NOT assume any recession. And we all know, what typically happens to the budget deficit in a recession.

What could possibly go wrong?

In reply to by new game

J S Bach withglee Thu, 04/12/2018 - 19:19 Permalink

"Precious Metals are not money. As soon as you accept them in trade, the trade is completed on-the-spot."

This is an insane statement.  The acceptance of precious metal as an equal "trade" is the purest definition of "money" that I can think of.  From there, the holder of that metal can then proceed to trade with whomever for whatever goods and services he pleases. 🙄  That's what money is!

In reply to by withglee

Baron von Bud bluecollartrader Thu, 04/12/2018 - 14:37 Permalink

With inflation rising, the debt and interest payments will explode. Perhaps this is the reason for the coming war. They have to maintain dollar dominance by force because all credibility will soon be gone. Unfortunately for Bolton, America will have to shrink the military and stop giving welfare to illegals or a waterfall of debt will swamp DC and destroy the dollar. That will only buy a little time. Then the pension defaults will hit and then the State bankruptcies. At least $3T more will be needed to plug just the pension hole. There's no way out of this.

In reply to by bluecollartrader

GreatUncle Baron von Bud Thu, 04/12/2018 - 17:04 Permalink

The west is in exactly the same position not just the US.

They also know if they do not go to war then the ponzi gets found out so war is their only logical choice.

Once the west is in agreement on this it is very easy to grab a whole load of nations and say ... look if we do not go to war we will all be hanged so best expel all those diplomats and ramp up the rhetoric.

 

 

In reply to by Baron von Bud

greenskeeper carl bluecollartrader Thu, 04/12/2018 - 14:44 Permalink

Its funny reading about this while also reading about our increasingly likely war with Syria and/or Russia. Second highest spending in a month in history, but sure, we've got plenty of money for another war.

 

Just watch, too, some of the loudest mouths urging us towards war are often the same ones claiming to be "budget hawks" and they never seem to think one has to do with the other.

In reply to by bluecollartrader

curbjob silverer Thu, 04/12/2018 - 14:54 Permalink

The mathematicians at the Fed have long ago realized there's no digging out from under the mountain of debt;

plan B was to inflate it away by increasing the money supply  chasing depleting resources ... a miserable failure because cheap money just led to over capacity; most notably in equities as AmericaInc bought  back their own stock; why innovate when you can masturbate ?

The plan is still to inflate the debt away by reverting back to the methodology  that has historically worked before. War.

In reply to by silverer

photonsoflight silverer Thu, 04/12/2018 - 15:18 Permalink

I would rather hire a stoner than some nut job strung out legally on pharmacuticals​. You know the type , ready to shoot up movie theaters or worse , they got one of those weekly pill boxes that sounds like they are carrieing four or five packs of tic tacs. They always needs to see their dealer(doctor) for more drugs. All paid for with our tax dollars.  Yep I would rather have the stoner for sure then some old government leach.

In reply to by silverer