Author: Pat McFadden, M2 Global
Covestor model: M2 Global
Disclosure: None
I am concerned by the current political theatre in Washington, as we are coming to a point in the next three to four weeks that could potentially unravel our financial system, a system that has operated since the death of President Kennedy. Virtually no one talks about the actual US debt, as most references for public consumption speak to operational “deficits.” The President’s speech on July 5th was no different. Moreover, Obama threw in more rhetoric about corporate tax deductions on aircraft, when virtually all corporate assets can be depreciated utilizing some form of accelerated schedule. This is pure politics, since likely not more than 100 in 100,000 people fully understand depreciation and amortization schedules. The fact that supposed allies such as Warren Buffett and Nancy Pelosi own investments tied to this industry is ironic. The issue that is not being addressed head on is debt maturities.
Until I looked closely, very recently, I did not believe a US default on our debt was a serious short term issue. This assumption may be perilous. The Bipartisan Policy Center or BPC has produced a “Debt Limit Analysis” published July 1, 2011 that shows why Mr. Geithner and the Administration may be on edge.
According to the report, between August 3rd and August 31st the US Government will run a deficit of approximately $134 billion. My reading of the Treasury accounts at the Fed in the latest (7 July 2011) H.4.1 report indicates that the Treasury may have the ability to meet this shortfall. This figure includes all government operations and interest expense. Cursory attention, which I believe the President is hoping most will give, would indicate that we don’t have a relatively large cash flow problem – possibly just a $20-$25 billion shortfall. But the Policy Center reveals the real problem, the problem even the mainstream media seems squeamish to highlight.
The real problem according to the PBC is that nearly $500 billion in US Treasury debt will mature in August, and without an increase in the debt ceiling the Treasury will not be able to raise additional cash to pay off this debt when the holders ask for their money back.
This would seem the classic definition of bankruptcy. About $90 billion looks to be longer term notes and bonds, thereby matching the information available at treasury.gov websites. However, the Treasury has stopped issuing such reports for more than a year. This seems to lend credibility to the BPC’s indication that more than $375 billion in T-bills with a 1 year life will mature during August 2011.
Since the Fed does not seem to own most of these short term bills itself, I do not see how the Fed avoids directly monetizing the US Debt if the debt ceiling is not lifted. Given that there are trillions of dollars in money market mutual funds, risking any default on a Treasury T-Bill would seem to be unthinkable for even the most ideological person.
My hope is that the GOP is able to leverage this situation into a long term plan that will cut future deficit spending and provide the US economy with the competitive structure and certainty of expectations that will allow us to grow out of the debt in the future.
Sources:
Debt Limit Analysis, BPC http://www.bipartisanpolicy.org/library/staff-paper/debt-limit-analysis
Federal Research treasury accounts. http://www.federalreserve.gov/releases/h41/current/
