Seeking Alpha

Scott Anderson's  Instablog

Scott Anderson
Send Message
I am a bored corporate accountant who has been following the debt/deficit issue personally for nearly a decade. A few years back, looking for a better understanding of the US deficit, I stumbled across the Daily Treasury Statement, which is essentially a daily cash flow statement for the US... More
My blog:
US Daily Deficit
View Scott Anderson's Instablogs on:
  • August 2013 Monthly Statement Of Public Debt

    Every month, Treasury releases the Monthly Statement of Public Debt which gives us a detailed breakdown of the public debt outstanding…each issue still outstanding, rates, terms ect..

    "Why is this interesting?" you may be asking yourself. Well…it's interesting for me because we get to compare the actual issue rates over time. You see…bond yields are in constant motion…changing every single day in response to market forces, fed manipulation ect… Investors can make or lose fortunes on those moves, but just like your 30 year mortgage, once issued, the borrower, in this case the US government, has effectively locked in a rate for the duration….so any fluctuations after the fact have no affect on the future cash outflows for interest and ultimately principal repayment.

    So…let's start out by looking at the 30 year bonds….with about $1.5T outstanding.

    (click to enlarge)

    The chart shows all of the outstanding 30 year issues dating back to 1985 at 11.25%. You can clearly see the downward trend bottoming out a year ago at 2.75% in the August and November 2012 issues. More recently…the May 2013 was issued at 2.88%…this was before the increase in rates we have been hearing about. Sure enough, the August 30′s were issued at 3.63%, a .75% increase. That's not a good sign, but it's not exactly time to panic (at least not about rates). Rates on the 30 are still historically low, and the $16B issued last month isn't even large enough to move the needle on the weighted average rate on the 30′s, much less the entire $12T outstanding.

    Moving down to the 10 year with about $2.2T outstanding:

    (click to enlarge)

    The rate on the 10 year has fallen steadily from the May 2006 issue at 5.13% bottoming out in August and November 2012 at 1.63%. As with the 30 year, the issue rate increased 0.75% from 1.75% in May 2013 to 2.5% in August.

    There were no new 60 month issues, but I'll throw the chart out there just for fun.

    (click to enlarge)

    The pattern in the 60 is quite similar, moving off earlier year lows up about 75 basis points in recent months.

    (click to enlarge)

    Finally, a look at the 3 year with $1.2T outstanding, which has been bouncing around 0.25% for a few years now, recently rising to 0.63%.

    We could continue marching down the line, but the rates on everything shorter than 36 months are essentially zero….the 12 month rising from 0.11% to 0.14% is going to have a negligible effect the cash interest paid..I'll start worrying about those when they get closer to 1% or so.

    So what does it all mean? I've been saying for a while that when the Fed loses control of rates it will be game over for the deficit. Perhaps we've seen a 0.5% across the board increase in the past few months (including bills, which haven't moved much)…have they lost control? I don't think so…not yet anyway. Don't get me wrong, they will lose control, and this surely is not a good sign (for them…it may be good for savers), but we're just not there yet. They still seem to have no problem selling debt at not much higher that historic lows, even if a good chunk of that is being bought indirectly by the Fed.

    So while this is definitely bad news, odds are this will be a very slow motion train wreck. With $12T of debt already locked in, much of it at rates higher than current rates, it will take years of higher rates to materially change the cash interest paid.

    (click to enlarge)

    Above is a snapshot of the trailing twelve month cash interest paid. Even as the debt was skyrocketing, thanks to lower rates, the actual interest paid has increased only 61% from $133B to $214B over the same time period public debt outstanding nearly tripled from 4.4T to $12T.

    (click to enlarge)

    This chart shows us my estimated interest rate by dividing the TTM cash payments by the average public debt outstanding over the prior twelve months. the moderate uptick in rates has not stopped the decline in the total effective rate as older debt is being retired and rolled into lower rates, even if those rates are a bit higher than they were 3 months ago. We are currently at about 1.8%, and it took over 4 years to coast down 1% from 2.8% in April 2009.

    To wrap it up, I will just say that not a lot has changed….things are as bad as they've been, but exceptionally low interest rates are still enabling the government to carry a massive debt load. Rates are climbing off of historic lows, but it will take another % or two rise in rates and a few years before it really starts to show up in the cash deficit. With $12T outstanding, a 1% rise in effective rates would cost an additional $120B per year in interest expense…which would be added to the deficit and grow exponentially from there. We're not there yet, but stay tuned. If rates continue to go up, the destructive power of compound debt will be unleashed on the annual deficit, providing the final nail in the coffin, finishing up what Social Security started. In short…yes, we are still doomed.

    Sep 14 1:51 PM | Link | Comment!
  • Detroit Bankruptcy - Ich Ben Ein Detroiters

    I don't think it shocked anyone that Detroit filed for bankruptcy yesterday, but it set off a mad scramble by the creditors….most interestingly perhaps(but not surprising)…by the city's pension funds.

    First…lets take a look at the numbers. I found a copy of the city's last full fiscal report on their website….covering the period ending 06/30/2012. I'm guessing the 6/30/2013 may be delayed by just a bit.

    Ballpark….per page 21, total revenues were $2.3B, vs. total expenses of $2.6B, for a total deficit of $300M. That's a 13% annual deficit…which honestly doesn't sound that huge. The US deficit…over the last 12 months ending 6/30/2013 was $800B….$3T of revenues and $3.8T of outlays….good for an annual deficit of 27%….more than double of Detroit's.

    Debt, according to the headlines at the time of the bankruptcy filing was $18B…about 8X 2012′s revenues. The US is in a little bit better shape….with $16.7T of debt on $3T of revenues, good for a 5.5X ratio. So, we still have a ways to go before we get to Detroit's level, but it is definitely on the horizon.

    Now…I don't have the 2013 numbers, but this clearly illustrates how a relatively small annual deficit can topple a huge mountain of debt. The bottom line is…as long as people are willing to lend me money….I can keep a scheme like this going indefinitely. I can borrow to pay my bills, I can borrow to pay pensions, I can borrow to build a football stadium, and I can borrow even more to pay the interest on all the debt I already have. But…once the lenders start to think maybe you can't pay it all back….it is almost instant death. All of a sudden…you can't make payroll, you can't provide police protection, and when your debt comes due….either the rates to refi are suddenly astronomical, or you just can't refinance at all. So while maybe you could afford to pay $30M or so of interest a year on that $1B bond coming due….but you certainly can't afford to refinance at 10%, and the odds of you coming up with $1B to…god forbid…actually pay down debt are zero.

    So who gets paid? There is $18B of debt, yet the city is running a deficit of $300M per year (again…year old data). And by all accounts…they are not even able to provide basic services to the city…like even fixing broken street lamps. The bondholders…well, they were foolish enough to keep lending, even though it has been obvious for a while what was going to happen. I think they should get nothing.

    Now the pensioners….this is a bit more complicated. There is no money to pay…it's a tragic situation no doubt. Some will argue that the unions negotiated outrageous pensions with their cronies in government…that's probably true to some degree. I don't know the answer, but if nothing else, this illustrates the enourmous unrecognized risk of defined benefit plans, whether it is from the city of Detroit, a fortune 500 company, or…the granddaddy of them all…Social Security. In all of these scenarios…you pay in or defer income for decades…perhaps half a century…for the promise that someday….decades later a) the organization will still exist period and b) the organization will still have the ability and willingness to make good on that promise.

    This in itself is something I find so hard to understand about defined benefit plans. How many people in this world would you personally trust to take care of hundreds of thousands, or millions of dollars of future benefits for you? Maybe your parents, siblings, or children….maybe… Uncle Sam? No!! Congress... with an approval rating of what…15%? No!! The mayor of Detroit? No!! Any CEO of any company? Hell No!! Wake up America. The entire premise of all defined benefit programs is blatant fraud. Rather than pay you now…in cash….companies and governments offer to pay you later…in another quarter, when it will be another CEO's problem…another Congress's problem…another Mayor's problem…another President's problem. Shall I say it again…wake the hell up!! You will not be paid. You were conned…you were scammed….you bought the lies hook line and sinker, and ultimately…you must own the consequences of your poor decisions. Yes you are a victim here…yes it sucks….unfortunately…nothing can be done about it. The money is gone….spent decades ago by politicians you elected.

    Ok…stepping off that soap box….We are all Detroiters (is that even the right word??) now. What happened to Detroit is what will ultimately happen to the United States Of America, and it may be sooner than any of us realize. Already….under the guise of helping a struggling economy, the Federal Reserve has resorted to manipulating interest rates to near zero and has resorted to essentially printing money and lending to itself using QE…to the tune of nearly $2T. These are already desperate measures….how long can Bernanke and Lew keep this charade going? My guess is less than 10 years….perhaps much less. As with Detroit…once we lose the ability to issue new debt and roll what you currently have…It will be nearly instant death. It would seem we have nearly run out of people to loan us money, so we have resorted to printing money and loaning it to ourselves with the Fed as a middleman. Were this game to end, and interest rates return to a normal rate…say 5% or so….I think we'd be done within a year or two.

    But…as many have noted….it is nearly impossible for a sovereign nation with it's own currency and a printing press to technically default. They are probably correct as this seems like the path of least resistance. So…in 2043 when you take that 30 bond in for redemption….you may well get your $1000….but you'll be lucky if it buys you a bag of potato chips. Same for today's 38 year olds….hoping to retire in 30 years. You very well may get a social security payment deposited into your account each month, but it won't even be enough to buy a bag of dog food…for your pet of course.

    Jul 19 2:52 PM | Link | 1 Comment
  • Debt Limit Recap Summer 2013

    It's been 62 days since we officially hit the debt limit of $16.7B on 5/17/2013, and according to the latest I've been reading, Treasury does not expect this to become a problem until the September-November time frame. This is a bit confusing, so give me a second to explain what is going on here.

    First…you need to know that hitting the debt limit is not the real problem….running out of cash is. If we hit the debt ceiling, but had $1T of cash in the bank, we could make it an entire year without having any problems. Obviously, we did not hit the debt limit with $1T of cash…we hit it with about $34B, but the point remains valid….we haven't had any problems yet because we haven't run out of cash.

    Now, assuming an annual deficit of $800B, you might expect a monthly deficit of $67B…at which pace we would have run out of cash sometime in early June. Except…it's not that simple. You see, the month to month deficit/surplus is actually all over the place, with February usually having the highest deficit at $200b+ and April typically running a strong surplus of $100B+. The rest of the months fall somewhere in between, with quarter end months generally being better on strong quarterly tax remittances.

    So the time it takes for the debt limit to be a problem depends on how much cash you have in hand at that point, and the expected deficit/surplus over the coming months. The last debt limit fight…you may recall came about in January…which is the absolute worst time to have a debt limit fight because a huge amount of tax refunds are scheduled to go out starting in February. If they don't go out…you could have a revolution on your hands, so not surprisingly, a deal was brokered, pushing the fight out to the middle of May, which as it turns out, is just about the best time to have a debt limit fight…if you must.

    The main reason is that you have the strong early month outflows behind you, and with June in front of you likely to run a surplus, you have at least a few months to work it out. This June ran a $116B cash surplus….building that $34B cash stash to $135B by June 30…thanks in part to a ~$60B payday loan to Fannie Mae. Now, July and August are not deficit friendly months…I expect about $200B over this two month period. That's more than $135B, but…thanks to the shenanigans known as "extraordinary measures"…which essentially hides real debt off the balance sheet…it seems likely that treasury can pull the difference out of its hat… September is likely another Surplus month, but small….so making it to September gets them through to early October. I don't see how they make it much further, but you never know.

    Now honestly, the date doesn't matter….it took us 30 years to get to this point…whether we run out of cash in August or November really doesn't batter one bit in the big picture. I fully expect the debt limit will be raised and here is why. Even with admittedly material improvement in the deficit…from $1.6T in 2009, to $600-$700B likely for calendar 2013…$700B is still a huge number. And if they don't raise the limit…they can't spend it. I'm not saying it's the right thing to do, but yanking that $700B per year out of the economy is going have immediate consequences that nobody in either party is ready to deal with.

    Basically, it would mean cutting everything by about 20%. Social Security, military pay, medicare, Medicaid, food stamps ect…. If you don't cut some…like SS and military pay….you have to cut even more from the remaining programs. $700B/60k per person gives me over 10M jobs lost directly, and who knows what the secondary and tertiary effects would be. Now…one way or another, that's going to happen anyway (and we will be better in the long run for it), but don't expect the debt limit to be the trigger. Both Republicans and Democrats will work together to keep the imaginary party floating as long as possible before gravity takes over and we all tumble down the cliff together.

    Because of this, I am quite confident that after a lot of noise and pretend victory claimed by both sides, the debt limit will be raised. Don't worry…Be Happy!!

    Tags: Debt Limit
    Jul 18 2:11 PM | Link | 2 Comments
Full index of posts »
Latest Followers

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.