The USA will Spend! Spend! Spend! As we wonder whatever happened to the debt ceiling?

by Shaun Richards

Yesterday evening there was a piece of news which created a stir even in these inflated times. So without further ado let me hand you over to the US Treasury Department.

During the April – June 2020 quarter, Treasury expects to borrow $2,999 billion in privately-held net marketable debt, assuming an end-of-June cash balance of $800 billion.  The borrowing estimate is $3,055 billion higher than announced in February 2020.

I have to confess the numbers did not look right so I checked the February release.

During the April – June 2020 quarter, Treasury expects to pay down $56 billion in privately-held net marketable debt, assuming an end-of-June cash balance of $400 billion.

This was to be quite an improvement on where it was at the time.

During the January – March 2020 quarter, Treasury expects to borrow $367 billion in privately-held net marketable debt, assuming an end-of-March cash balance of $400 billion.

So we return to the concept of some US 3 trillion dollars being borrowed in a single quarter. As to the higher cash balance which is in the process of being doubled that looks as though it is simply because the US is spending at such a rate it needs more to avoid the risk of a cash crunch. Indeed the process is well under way.

During the January – March 2020 quarter, Treasury borrowed $477 billion in privately-held net marketable debt and ended the quarter with a cash balance of $515 billion.  In February 2020, Treasury estimated privately-held net marketable borrowing of $367 billion and assumed an end-of-March cash balance of $400 billion. The $110 billion increase in borrowing resulted primarily from the higher end-of-quarter cash balance.

Where is the money going?

The US Treasury is light on some detail but the Paycheck Protection Program had spent some US $350 billion very quickly so we then saw this.

WASHINGTON (CNN)The Trump administration announced Sunday that 2.2 million small business loans worth $175 billion have been made in the second round of the Paycheck Protection Program……Treasury Secretary Steve Mnuchin and Small Business Administration Administrator Jovita Carranza said in a joint statement that the average size of a loan made under the second iteration of the program, which began Monday, was $79,000.

The original stimulus effort was described below by CNN.

Congressional lawmakers put the finishing touches on a $2 trillion stimulus bill to respond to the coronavirus pandemic, with cash and assistance for regular Americans, Main Street businesses and hard-hit airlines and manufacturers, among others……..Key elements of the proposal are $250 billion set aside for direct payments to individuals and families, $350 billion in small business loans, $250 billion in unemployment insurance benefits and $500 billion in loans for distressed companies.

We can see that like the small business loans the numbers are likely to have been climbing higher and higher. As to the new higher employment benefits they seem to be being paid to ever higher numbers.

The advance unadjusted number for persons claiming UI benefits in state programs totaled 17,776,006, an increase of 1,498,784 (or 9.2 percent) from the preceding week. The seasonal factors had expected a decrease of 648,558 (or -4.0 percent) from the previous week. A year earlier the rate was 1.1 percent and the volume was 1,647,874 ( Department of Labor)

I think we can figure out for ourselves what has been happening to tax revenues.

Treasury Bonds and QE

In ordinary times one might have expected this market to have cratered. I have worked through times when futures markets prices limits are employed ( it was initially 2 points and then moves to 3 points). But the surge in expected borrowing has provided nothing of the sort and these days eyes turn first to the US Federal Reserve and its Quantitative Easing programme. The emphasis below is mine.

To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate.

That is a sort of combination of “whatever it takes” and “To Infinity! And Beyond!” in my opinion. We saw purchases of US $75 billion a day in the height of the panic and we should not forget that in the heat of the “Not QE” phase some US $60 billion of US Treasury Bills were bought a month. So we see that it now owns some US $3.97 trillion of Treasury Securities which has risen by US $1.8 trlllion on the past year.

Thus although we are now seeing a much lower daily amount of QE purchases the surge of buying has anaesthetised the market. This week only US $8 billion a day is being bought and yet we see the benchmark yield for the ten-year Treasury Note if a mere 0.67%. The long bond ( 30 year) has responded a little but at 1.33% is less than half what it was this time last year.

Foreign Holdings

There is a long wait for such numbers but here is what the US Treasury thinks that they are.

The survey measured the value of foreign portfolio holdings of U.S. securities as of end-June 2019 to be $20,534 billion, with $8,630 billion held in U.S. equities, $10,991 billion in U.S. long-term debt securities [/1] (of which $1,417 billion are holdings of asset-backed securities (ABS) [/2] and $9,575 billion are holdings of non-ABS securities), and $913 billion held in U.S. short-term debt securities.


Remember the debt ceiling?

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary. ( US Treasury )

Anyway the total national debt was US $23.7 trillion at the end of March and is about to go on something of a tear. On the other side of the coin economic output as measured by GDP or Gross Domestic Product is about to plunge.

The WEI is currently -11.58 percent, scaled to four-quarter GDP growth, for the week ending April 25 and -10.86 percent for April 18; for reference, the WEI stood at 1.58 percent for the week ending February 29. ( New York Fed )

Or if you prefer.

The New York Fed Staff Nowcast stands at -9.3% for 2020:Q2.

Also the US Federal Reserve is about to get rather popular as we note how this trend will change in 2020.

In 2019, the Federal Reserve remitted a total of $54.9 billion to the Treasury, less than the $65.3 billion remitted in 2018, owing primarily to a decline in net income resulting from a decrease in average SOMA domestic securities holdings.

I guess both the US Federal Reserve and Treasury will be singing along with Prince for a while.

Money don’t matter to night
It sure didn’t matter yesterday
Just when you think you’ve got more than enough
That’s when it all up and flies away
That’s when you find out that you’re better off
Makin’ sure your soul’s alright
‘Cause money didn’t matter yesterday,
And it sure don’t matter to night