U.S. Debt Crosses 17 Trillion

As predicted before, the debt ceiling would be raised and now the treasury is going to issue an enormous amount of debt. The debt will now spike a lot to get the budget in order for the whole year of 2014. The Federal Reserve will now buy up all this debt and the U.S dollar is set to weaken as China will reduce its purchases of this debt. Evidence is to be found in the Chinese rating agencies. For example Dagong downgraded U.S. debt.

Just after the debt ceiling deal on 17-oct-2013, the debt increased from $16.7 to just over $17 trillion.

This is what it looks like. You can see that the slope is higher as usual as they are in need of cash.

What Will Happen When Debt Ceiling Isn’t Raised?

The government shut down on October 1, 2013. Some 800000 government workers are sent home without pay, but might get paid if a bill is created and passed to pay them for their lost time. During the last shutdown, in 1995 and 1996, Congress later passed legislation that made workers whole for the days they were furloughed. But today, at least 535 federal workers at Congress will get paid, for doing nothing, except for sabotaging the country’s core. It is estimated that the GDP would decline $1.6 billion/week or $83 billion/year. The U.S. GDP growth is 2%/year or $300 billion/year. So for example, if the government would shut down for a month, you wouldn’t be growing 2%/year, but 1.8%/year. Hardly noticeable…

On the other hand, we have a more significant date: 17 October. This is the day where the debt ceiling will be breached. That’s a more serious thing to consider. When the debt ceiling isn’t raised, there is the imminent problem of maturing debt. The short term maturities are going to be the ones that default first. Chart 1 gives the T-bills with their maturity date. Those that mature on 17 October have a spike in yield. You will see that those yields are skyrocketing every day closer to the debt ceiling default date of 17 October. So the market is anticipating an outright default. This will have severe implications on credit transactions all over the world as noted by Bill Gross.

Chart 1: T-bills

So what will the Federal Reserve do if we were to breach the debt ceiling, instead of raising the debt ceiling?

Go here to find out.

Federal Reserve: To Taper or not to Taper

There is all this talk about “tapering”. Will the Federal Reserve taper or not taper, that’s the question. To find the answer, we need to take a look at the U.S. national debt.

This is really a weird sight, do we really have an actual debt ceiling? Aren’t we going to raise the debt ceiling? U.S. public debt has been growing at almost $200 billion a month and has been staying flat just recently.

Chart 1: U.S. Public Debt

Since May 19, 2013, the debt ceiling has been stuck at $16.735 trillion and this ceiling has been in place for almost 2 months as chart 1 suggests. The treasury says that they would be able to pay all the bills until October by enacting extraordinary measures from May 20 till August 2.

In all, the Treasury has the following measures available to it:

• Suspend the investments of the Thrift Savings Plan G Fund (otherwise rolled over or reinvested daily, such investments totaled $130 billion in Treasury securities as of May 31, 2013);
• Suspend investments of the Exchange Stabilization Fund (otherwise rolled over daily, such investments totaled $23 billion as of May 31, 2013);
• Suspend the issuance of new securities to the Civil Service Retirement and Disability Fund and Postal Service Retiree Health Benefits Fund (totaling an estimated $79 billion on June 30, 2013, and about $2 billion each subsequent month);
• Redeem early securities held by the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund equal in value to expected benefit payments (valued at about $6 billion per month);
• Suspend the issuance of new State and Local Government Series (SLGS) securities and savings bonds (between $4 billion and $17 billion in SLGS securities and less than $1 billion in savings bonds are issued each month); and
• Replace Treasury securities subject to the debt limit with debt issued by the Federal Financing Bank, which is not subject to the limit (up to $8 billion).

And due to higher tax revenues at the start of 2013, we see that interest payments on government debt weren’t a problem. In fact, the interest payments as a percentage of tax revenue has been declining since 2013 (Chart 2).

Chart 2: Interest payments as a % of tax revenue

Though, there is one parameter that was not anticipated and that is the effect of higher interest rates and higher mortgage rates.

Read the analysis here.

Biggest drop in U.S. bonds in 2 months

A little update on the decoupling experiment I started 2 months ago. I wanted to see if the S&P could decline together with a decline in U.S. bonds and the U.S. dollar. This would mean each graph (red, green, blue) on chart 1 would go down. It hasn’t started doing that yet.

What I did want to take note of is the big decline in U.S. bonds (green graph). On Friday 3 August, 10 year U.S. bond yields spiked to a 1.563% yield. This is almost a 10 basispoints rise in yield. Probably people are worried about the massive U.S. debt, which went to a record 15.933 trillion dollars from 14.8 trillion dollars a few weeks earlier.

The debt ceiling of 16.3 trillion (to be heightened to 16.7 trillion) is near. I predict this debt will go up even faster because no QE3 has been implemented, which means yields will go up and as a consequence interest payments on debt will go up as well.

Chart 1: Monitoring of decoubling USD vs. bonds vs. stocks

U.S. debt jumps by $US 75 billion overnight

U.S. debt jumped $US 75 billion overnight, which is a pretty big jump. Total U.S. public debt jumped from $US 15.781 trillion (28-Jul-2012) to $US 15.856 trillion (29-Jul-2012). The debt ceiling of $US 16.7 trillion is coming closer and closer.

Historically, the biggest jumps were $US 154 billion overnight on 31-Dec-2010, $US 166 billion on 30-Dec-2009 and $US 166 billion on 29-Jun-2010. Average jump in debt is $US 3.5 billion.

Chart 1: Total U.S. Public Debt

By 2013: Another Increase in U.S. Debt Ceiling

Everyone is saying how great the United States is growing with a positive purchasing manager index and positive GDP. But the fact is that U.S. public debt is growing much faster as GDP. But this happened only just recently.

Before 2008 (the economical crisis), debt was increasing at a slower pace as GDP. The slope at which debt rose was moderate. Notable is that for each unit increase of debt, we got more than one unit increase in GDP.

After 2008 though, we get a very different picture. Please go here to read my analysis. 

Chart 1: U.S. Total Public Debt VS. U.S. Debt Ceiling