June 3, 2011
Today, very quietly, the Treasury released its latest refunding announcement, in which it disclosed it would issue another $66 billion in 3, 10 and 30 Year notes next week. The irony of course is that the US is and continues to be at its debt ceiling limit (or just $25 million short of it), at a total of $14,293,975 million. Furthermore, as was also disclosed by the Treasury, this gross issuance will also be the net amount added in marketable debt, as upon settlement on June 15, there will be no redemptions of maturing bonds. Which simply means that the continued “disinvesting” (which is merely a polite word for plundering) from intragovernmental debt, also known as retirement accounts, is about to kick into high gear. As a reminder, the only solution that Geithner currently has to run the government, at least until August 2 when even this runs out, is to slowly drain the debt in non-marketable accounts, in the form of Suspension of G-Fund and ESF reinvestments, as well as the Redemption and suspension of of CSRDF Investments, measure which when combined will provide a short-term buffer of $232 billion. Yet for all practical purposes, what is happening is that retirement accounts are now being seriously plundered, and if the unthinkable were to happen, and the debt ceiling would not rise, not only would the US be in technical default, but various retirement funds, which already are underfunded, would find themselves even more severely in the Red. As the chart below shows, the total amount of intragovernmental debt currently outstanding, has dropped to levels last seen in early April, even as total debt has continued its steadfast move higher. The scary thing is that by the time August 2 rolls around, the current total of $4.608 trillion in various Trust Funds, will drop to well about $4.4 trillion, or an implicit 6% underfunding in 2 months merely to keep the bloated government operating for a few more months.
Of course if everything turns out fine, these disinvestments will be promptly reversed as the Treasury doubles down on its borrowing spree to fund the retirement accounts that currently are being pillaged. For the sake of all government worker retirees, we hope this is the final outcome.
In the meantime, for an explanation of the “disinvestment” process, here a brief primer from Stone McCarthy:
On May 16, Treasury effectively hit the current $14.294 trillion debt ceiling and began employing the tools available to avoid breaching the debt ceiling. Since May 16, the debt subject to the debt limit has been $14.293975 trillion each day, showing that Treasury has $25 million in breathing room under the debt ceiling.
Unfortunately (for geeks like us), it’s not completely transparent how Treasury is managing the debt versus the debt limit on a daily basis. In a nutshell, Treasury appears to be disinvesting non-marketable securities on an as-needed basis to maintain that $25 million of breathing room under the ceiling. We do know that Treasury has used three of the tools available: Suspending G-Fund reinvestments, redeeming investments of the Civil Service Retirement and Disability Fund (CSRDF), and suspending new CSRDF investments. In sum, those options use about $147 billion of roughly $264 billion available to Treasury to create room to issue new marketable debt.
Before mid May, we thought Treasury would exhaust available measures to create room under the debt limit on August 1; Treasury expects to run out of room to borrow on August 2. The difference of one day is significant, because Treasury’s projection assumes the ability to settle 2-, 5- and 7-year note auctions on August 1.
At this point, we are going to assume that the Treasury has more information than we do, and that those auctions will settle on August 2. We think it’s becoming increasingly more important to focus on Treasury cash flows than on debt under the debt limit. The ultimate day of reckoning comes when Treasury runs out of cash, not when it runs out of room to issue new debt. Many in Congress and the press appear to confuse the two, and Treasury hasn’t worked that hard to draw a distinction (although Secretary Geithner’s last letter to Congressional leaders said that August 2 was the date on which “Treasury projects the borrowing authority of the United States will be exhausted.”)
As we noted in a recent Chart of the Day comment, we think Treasury will run out of cash in mid August, assuming that it doesn’t put off paying any obligations. Those projections still hold; based on our forecast, Treasury would be able to pay its August 15 coupon interest payment, but might not have enough cash to pay about $9.1 billion in Social Security benefits payments on August 17. Those projections can change a lot in either direction, however, over the next two months, depending mostly on the strength of tax receipts. Also, it’s possible that Treasury could raise cash from other sources, including accelerated sales of MBS, although Treasury has made it clear it doesn’t want to rely on asset sales to raise cash.
At this point, we do think some sort of deficit reduction deal will emerge from the talks Vice President Biden is holding with members of Congress. It’s not likely to be a “grand bargain” along the lines of the proposal from the President’s deficit reduction commission, but it will probably be enough to create a vehicle for a debt ceiling increase before Treasury runs out of cash.
That outcome isn’t certain — the two sides remain far apart. Comments from House Majority Leader Eric Cantor over the weekend were telling. On CBC’s Face the Nation, Cantor reportedly said the talks have been positive. “Everything is on the table…we’ve said, as Republicans, we’re not going to go for tax increases.” Democrats certainly have a different definition of everything being on the table.
This article was posted: Friday, June 3, 2011 at 5:38 am