Posts Tagged ‘Debt Ceiling’

Authored by David Stockman

Maybe the Democrats did win the 2016 election. Or at least the Deep State and its accomplices among the beltway political class, K-Street lobbies and the media did.

That’s because the media won a giant victory against something they deplore and despise more than anything else – the public debt ceiling. They sanctimoniously admonish that it’s a relic of the nation’s fiscally benighted past. They operate on a belief that this is an episodic tendency to threaten America’s credit and to offer Capitol Hill an opening to grandstand about the fiscal verities is a blight on orderly governance.

So the Donald’s latest burst of impetuosity — agreeing with Sen. Schumer to permanently abolish the public debt ceiling — has descended on the beltway like manna from heaven. Not Barack Obama, Bill Clinton, Jimmy Carter or even the Great Texas Porker, Lyndon Johnson, dared to utter the thought of it — at least not in polite company.

Suddenly, and notwithstanding all the good he has done disrupting the status quo, the Donald has become the foremost enemy of America’s very financial survival.

The Federal budget is a Fiscal Doomsday Machine. The depository of American wars and entitlements have run rampant. Under the pile drivers of a global empire and the retiring baby boom, it is rapidly propelling the nation toward fiscal catastrophe. That grim outcome is virtually guaranteed if the only remaining safety brake — the debt ceiling — is summarily abolished.

Due to entitlements, debt service and the slow pipeline of appropriated spending there is no such thing as an annual Federal budget or accountability for how much Uncle Sam spends and borrows. Instead, the $4.1 trillion that Congressional Budget Office (CBO) projects the Federal government will spend in FY 2018, and the $563 billion it will borrow, reflects the dead hand of the past.

Entitlements and other mandatory spending alone is projected to reach $2.566 trillion or 63% of total FY 2018 outlays.

Another $307 billion will be required for interest on the nation’s $20 trillion public debt, while upwards of half the $1.22 trillion for so-called “discretionary” or appropriated programs also reflects funds appropriated years ago.

Altogether, $3.5 trillion, or 85% of outlays, will be essentially baked into the cake before a single Congressional vote is taken on anything regarding the FY 2018 budget.

The Federal spending machine is almost entirely on autopilot and heading for disaster owing to ballooning populations and debt. Ten years from now the combined cost of mandatory programs and debt service will reach $5.12 trillion compared to just $2.87 trillion during FY 2018.

Entitlement spending will be nearly double — even if Congress took a 10-year recess!

As shown below, that means the Federal spending share of GDP is now inexorably climbing toward 30% owing to baby boom retirements, even as revenue under current law is stuck at about 18% of GDP. The CBO’s latest projection of the widening fiscal gap — soon more than 10% of GDP annually — leaves nothing to the imagination.

America really does have in place a Fiscal Doomsday Machine.

The Fiscal Doomsday Gap Is Uncloseable — The Crisis Is Permanent

In the chart above, it is easy to see why the beltway argument — that we’ve already spent the money and must liquidate by borrowing whatever it takes — is so thoroughly wrong. The tidal forces driving the budget are so enormous and dangerous that some kind of automatic, institutionalized braking force is absolutely necessary.

The fiscal exigencies of empire, demographics and debt have now become insuperable.

In the case of demographics, it is all right here. The baby boom is retiring at a rate of 10,000 per day, and the wave will not crest until there are nearly 100 million Americans over 65 years of age — double today’s 50 million.

Needless to say, at an average cost of $35,000 per year for retirement pensions and medical care alone, the fiscal math becomes prohibitive.

The voting and political math is downright impossible, and has been that way for the last 34 years.

The last time any significant chunk was taken out of social security or medicare benefits was back in 1983 when the Congress did agree to the Greenspan Commission’s proposal to delay the payment date of the Social Security cost of living allowance (COLA) by the grand sum of 90 days on a one-time basis!

There was one other change, that I was personally involved in, that seals the case. Working with Greenspan we had narrowed the benefit cut options down to a binary choice and presented it to the swing vote on the commission. The latter happened to be 88 year-old Claude Pepper — a left-over from the New Deal era and champion of America’s elderly lobby.

Did he want a reduction in early retirement benefits immediately or an increase in the retirement age starting 30 years hence? Apparently, Senator Pepper concluded he would not live to be 118, and choose the second option!

All of that happened when the over 65 population was about 28 million, not 100 million.

There is no plausible scenario in which Congress will proactively and voluntarily address reform for the ballooning population of elderly Americans. It will only happen when action is forced by the debt ceiling mechanism — the equivalent of a credit card cancellation on a national level.

The recent utter failure to do anything at all about ObamaCare and the underlying health care system that is already consuming 18% of GDP only reinforces the case for a fiscal dues ex machina. As seen below, the cost of the medical entitlements alone relative to national income will double from 5% to 10% over the next three decades.

There is no plausible scenario in which Congress will proactively and voluntarily address reform for the ballooning population of elderly Americans. It will only happen when action is forced by the debt ceiling mechanism — the equivalent of a credit card cancellation on a national level.

The recent utter failure to do anything at all about ObamaCare and the underlying health care system that is already consuming 18% of GDP only reinforces the case for a fiscal dues ex machina. As seen below, the cost of the medical entitlements alone relative to national income will double from 5% to 10% over the next three decades.

Where that leads, of course, is to fiscal catastrophe.

Without a fiscal braking mechanism that is external to voluntary legislative action, the day of reckoning will be catastrophic.

Even by the CBOs own Rosy Scenario based long-term projections, the nation’s public debt ratio is heading for a Greek-style 150% within the next 25 years, and by our own more sober view of the economic future far worse than that.

When Washington descends into complete fiscal disarray, the meltdown will be on and the grim reaper of recession will be just around the corner.

Advertisements

Authored by Simon Black

 

Late yesterday afternoon the federal government of the United States announced that the national debt had finally breached the inevitable $20 trillion mark.

This was a long time coming. It should have happened back in March, except that a new debt ceiling was put in place, freezing the national debt.

For the last six months it was essentially illegal for the government to increase the debt.

This is pretty brutal for Uncle Sam. The US government hasn’t run a budget surplus in two decades; they depend on debt in order to keep everything running.

And without the ability to ‘officially’ borrow money, they’ve basically spent the last six months ‘unofficially’ borrowing money by plundering federal pension funds and resorting to what the Treasury Department itself calls “extraordinary measures” to keep the government running.

Late last week the debt ceiling crisis came to a temporary armistice as the government agreed once again to temporarily suspend the debt limit.

Overnight, the national debt soared hundreds of billions of dollars as months of ‘unofficial’ borrowing made its way on to the official books.

The national debt is now $20.1 trillion. That’s larger than the size of the entire US economy.

You’d think this would be front page news with warnings being shouted from the rooftops of America.

Yet curiously the story has scarcely been covered.

Today’s front page of the New York Times tells us about Hurricane Irma, North Korea, and alcoholism in Iran.

Even the Wall Street Journal’s front page has zero mention of this story.

In fairness, the number itself is irrelevant. $20 trillion is merely a big, round, psychologically significant number… but in reality no more important than $19.999 trillion.

The real story isn’t the number or the size of the debt itself. It’s the trend. And it’s not good.

Year after year after year, the US government spends far more money than it collects in tax revenue.

According to the Treasury Department’s own figures, the government’s budget deficit for the first 10 months of this fiscal year (i.e. October 2016 through July 2017) was $566 billion.

That’s larger than the entire GDP of Argentina.

Since the government has to borrow the difference, all of this overspending ultimately translates into a higher national debt.

Make no mistake, debt is an absolute killer.

History is full of examples of once-dominant civilizations crumbling under the weight of their rapidly-expanding debt, from the Ottoman Empire to the French monarchy in the 1700s.

Or as former US Treasury Secretary Larry Summers used to quip, “How long can the world’s biggest borrower remain the world’s biggest power?”

It’s hard to project strength around the world when you constantly have to borrow money from the Chinese… or have your central bank conjure paper money out of thin air.

And yet tackling the debt has become nearly an impossibility.

Just look at the top four line items in the US government’s budget: Social Security, Medicare, Military, and, sadly, interest on the debt.

Those four line items alone account for nearly NINETY PERCENT of all US government spending.

Cutting Social Security or Medicare entitlements is political suicide.

Not top mention, both of those programs are actually EXPANDING as 10,000 Baby Boomers join the ranks of Social Security recipients every single day.

Then there’s military spending, which hardly seems likely to fall significantly in an age of constant threats and warfare.

The current White House proposal, in fact, is a 10% increase in military spending for the next fiscal year.

And last there’s interest on the debt, which absolutely cannot be cut without risking the most severe global financial meltdown ever seen in modern history.

So that’s basically 90% of the federal budget that’s here to stay… meaning there’s almost no chance they’re going to be able to reduce the debt by cutting spending.

But perhaps it’s possible they can slash the national debt by growing tax revenue?

Possible. But unlikely.

Since the end of World War II, the US governments’ overall tax revenue has been VERY steady at roughly 17% of GDP.

You could think of this as the federal government’s ‘slice’ of the economic pie.

Tax rates go up and down. Presidents come and go. But the government’s slice of the pie almost always remains the same 17% of GDP, with very small variations.

With data this strong, it seems rather obvious that the solution is to allow the economy to grow unrestrained.

If the economy grows rapidly, tax revenue will increase. And the national debt, at least as a percentage of GDP, will start to fall.

Here’s the problem: the national debt is growing MUCH faster than the US economy. In Fiscal Year 2016, for example, the debt grew by 7.84%.

Yet even when including the ‘benefits’ of inflation, the US economy only grew by 2.4% over the same period.

In other words, the debt is growing over THREE TIMES FASTER than the economy. This is the opposite of what needs to be happening.

What’s even more disturbing is that this pedestrian economic growth is happening at a time of record low interest rates.

Economists tell us that low interest rates are supposed to jumpstart GDP growth. But that’s not happening.

If GDP growth is this low now, what will happen if they continue to raise rates?

(And by the way, raising interest rates also has the side effect of increasing the government’s interest expense, essentially accelerating the debt problem.)

Look– It’s great to be optimistic and hope for the best. But this problem isn’t going away, and it would be ludicrous to continue believing this massive debt is consequence-free.

There’s no reason to panic or be alarmist.

But it’s clearly time for rational people to consider this obvious data… and start thinking about a Plan B.

Do you have a Plan B?

 

Following President Trump’s sign off last Friday on a short-term debt-ceiling/government funding/hurricane aid deal (thanks to Democrats’ votes), the US Treasury was finally freed from the shackles of the debt ceiling which it hit nearly one year ago and which meant that US federal debt would be at roughly $19.808 trillion for months.

Well, no more: according to the latest Daily Treasury Statement as of Friday, total US debt surged by $317.6 billion from its Thursday closing print of $19.845 trillion, following the short-term debt suspension which kicked the can through December 8, to finally rise above the “psychological barrier” of $20 trillion, or $20,162,176,797,904.13 to be precise.

As shown in the chart below, from March 16 until Thursday, Sept. 8, the official federal debt subject to the legal limit was at $19,808,747,000,000, i.e. the statutory debt ceiling. This is because the previous suspension of the debt limit expired on March 15 and the debt limit had been reset on that day at the level the debt reached at the close of business that day. On that day, the Treasury started using “extraordinary measures” to keep the debt subject to the limit about $25 milion below the limit.

The Treasury was finally freed from this limit on Friday, and thus the $317.6 billion surge in one day as the US Government replenished its extraordinary measures, which should allow the Treasury to coast until some time in March even after the next debt ceiling is hit on December 8.

Over the last several weeks, I have discussed the markets entrance into the “Seasonally Weak” period of the year and the breakout of the market above the downtrend line that began last year.

The rally from the February lows, driven by a tremendous amount of short covering, once again ignited “bullish optimism.” 

“Canaccord Genuity’s Tony Dwyer estimates the equity benchmark will end 2017 at 2,340, an increase of 15 percent from Wednesday’s closing level of 2,047.63, with half of the gains coming this year.”

But it is not just Tony that is buying into the “optimistic” story, but investors also as the number of stocks on “bullish buy signals” has exploded since the February lows.

SP500-BullishPercent-052416

While the “bulls” are quick to point out the current rebound much resembles that of 2011, I have made notes of the differences between 2011 and 2008. The reality is the current market set up is more closely aligned with the early stages of a bear market reversal.

It is the last point that I want to follow up with this week.

There is little argument that the bulls are clearly in charge of the market currently as the rally from the recent lows has been quite astonishing. However, as I noted recently, the current rally looks extremely similar to that seen following last summer’s swoon.

SP500-DailyChart-052416

Well, here we are once again entering into the “seasonally weak” period of the year. Will the bullish hopes prevail? Maybe. But.

 

Warning Signs Everywhere

Many have pointed to the recent correction as a repeat of the 2011 “debt ceiling default” crisis. Of course, the real issue in 2011 was the economic impact of the Japanese tsunami/earthquake/meltdown trifecta, combined with the absence of liquidity support following the end of QE-2, which led to a sharp drop in economic activity. While many might suggest that the current environment is similar, there is a marked difference.

The fall/winter of 2011 was fueled by comments, and actions, of accommodative policies by the Federal Reserve as they instituted “operation twist” and a continuation of the “zero interest rate policy” (ZIRP). Furthermore, the economy was boosted in the third and fourth quarters of 2011 as oil prices fell, Japan manufacturing came back on-line to fill the void of pent-up demand for inventory restocking and the warmest winter in 65-years which gave a boost to consumers wallets and allowed for higher rates of production.

 

2015-16 is a much different picture. 

First, while the Federal Reserve is still reinvesting proceeds from the bloated $4 Trillion balance sheet, which provides for intermittent pops of liquidity into the financial market, they have begun to “tighten” monetary policy by ending QE3 and increasing the overnight lending rate. As shown below, the changes to the Fed’s balance sheet is highly correlated to the movements of the S&P 500 index as liquidity is induced and extracted from the financial system.

Fed-BalanceSheet-SP500-052416

Secondly, despite hopes of stronger rates of economic growth, it appears that the domestic economy is weakening considerably as the effects of a global deflationary slowdown wash back onto the U.S. economy.

EOCI-Index-Indicator-042816

Third, while “services” seems to be holding up despite a slowdown in “manufacturing,” the service sector is being obfuscated by sharp increases in “healthcare” spending due to sharply rising costs of healthcare premiums. While the diversion of spending is inflating the services related part of the economy, it is not a representation of a stronger “real” economy that creates jobs and increased wages. 

CPI-Breakdown-052416

Fourth, the US dollar, as I addressed in this past weekend’s missive, is back on the rise.

“Well, with the revelation of the recent FOMC minutes the worries about a June rate hike, as suspected, have indeed surfaced sending the US dollar spiking above resistance.”

USD-Index-052116

If the Fed hikes rates in June, as is currently expected, higher rates will attract foreign money into US Treasuries in search of a higher yield. The dollar will subsequently strengthen further impacting commodity and oil prices, as well as increase the drag on companies with international exposure. Exports, which make up more than 40% of corporate profits, are sharply impacting results in more than just “energy-related” areas. This is not just a “profits recession,” it is a “revenue recession” which are two different things.

 which are two different things.

Corporate-Profits-ROE-041416

Lastly, it is important to remember that US markets are not an “island.” What happens in global financial markets will ultimately impact the U.S. The chart below shows the S&P 500 as compared on a performance basis to the MSCI Emerging Markets and Developed International indices. Notice the previous correlation in the overall indices as compared to today. Currently, the weakness in the international markets is being dismissed by investors, but it most likely should not be considering the ECB’s recent “bazooka” of QE which has clearly failed.

SP500-International-Emerging-052416-2

 

Lack Of Low Hanging Fruit

As I suggested previously, the “seasonally weak” period of the year may be a good opportunity to reduce risk as we head into the “dog days of summer.” 

“Does this absolutely mean that markets will break to the downside and retest February lows? Of course, not. However, throw into the mix ongoing high-valuations, uncertainty about what actions the Federal Reserve may take, ongoing geopolitical risks, concerns over China, potential for a stronger dollar or further weakness in oil – well, you get the idea. There are plenty of catalysts to push stocks lower during what is typically an already weak period.

 

Should you ‘sell in May and go away?’  That decision is entirely up to you. There is never certainty in the market, but the deck this summer seems much more stacked than usual against investors who are taking on excessive equity based risk. The question you really need to answer is whether the ‘reward’ is really worth the ‘risk?’”

While the recent rally has certainly been encouraging, it has failed to materially change the underlying momentum and relative strength indicators substantially enough to suggest a return to a more structurally sound bull market. (valuations not withstanding)

SP500-DailyChart-052416-3

With price action still confirming relative weakness, and the recent rally primarily focused in the largest capitalization based companies, the action remains more reminiscent of a market topping process than the beginning of a new leg of the bull market. As shown in the last chart below, the current “topping process,” when combined with underlying “sell signals,” is very different than the action witnessed in 2011.

SP500-DailyChart-052416-4

While I am not suggesting that the market is on the precipice of the next “financial crisis,” I am suggesting that the current market dynamics are not as stable as they were following the correction in 2011. This is particularly the case given the threat of a “tightening” of monetary policy combined with significantly weaker economic underpinnings.

The challenge for investors over the next several months will be the navigation of the “seasonally weak” period of the year against a backdrop of warning signals. Importantly, while the “always bullish” media tends to dismiss warning signs as “just being bearish,” historically such unheeded warnings have ended badly for individuals. It is my suspicion that this time will likely not be much different, the challenge will just be knowing when to leave the “party.”

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch