There is No Government Shutdown Nor Default Threat

Oct
11

By Charles Biderman

 

The idiocy in Washington on both sides is almost too tough to watch. First off, there is no government shutdown. Yes, about 500,000 government workers are on furlough and not getting paid right now. But over 20 million direct and indirect government workers are still on the job and getting paid! So how can a 2.5 percent, yes 2.5 percent, temporary reduction in workforce be called a shutdown?

 

This is nothing more then The Big Lie that George Orwell first popularized as to how big government manipulates the sleeping populace. A 2.5 percent cut in the workforce is really nothing. Would any business entity forced to layoff 2.5 percent of its workforce say that has shut them down? Of course not. But what this government has done as part of the Big Lie is to shut the non-essential public interface such as museums, national parks, and even internet sites – stuff that costs very little.

 

Then there is the total bullshit that not lifting the debt ceiling will create a US government default. How many of you know that the US government collects around $220 billion a month in taxes? And interest payments on publicly held government debt is around $30 billion a month? $220 billion in monthly tax collections is more then enough money to pay $30 billion in interest payments.

 

That’s not a default. That’s just more of the big lie. To make this more understandable, let’s eliminate six digits from the prior numbers and imagine that you or I make $220,000 a month and have monthly interest payments of $30,000 a month. Would we in default? Of course not, we would have more then enough money to pay the interest on our debt.

 

But lets take the analogy of comparing the government with you or me one step further, and imagine that you or I had made commitments to pay others $300,000 a month. Yes, that is more than our $220,000 a month income, and our lenders are saying they won’t lend us any more money. That is not a default. That is a problem of overspending. How would or I you solve the problem of making $220,000 a month and spending $300,000 a month? Simple, you or I would have to cut back on spending and life would go on.

 

But wait, what is most of our spending is wasteful and ineffective at providing services? A cap on borrowing would be a great way to eliminate waste and financial fraud both by government workers and the recipients of government largesse.

 

The next Big Lie to refute is that the US economy is rebounding thanks to Mr. Obama. What total, total bullshit! To truth is there is no rebound. In fact the economic growth is down year over year. Our analysis of daily withheld income and employment taxes says wage and salary growth before inflation has dropped to 2 to 3 percent this year from 3 to 4 percent in 2012. That’s a roughly 1 percent drop in growth. Why? Simple reason, starting in January income and employment taxes have been raised by about 1 percent. So in 2012 jobs grew by about 160,000 a monthly and this year jobs are growing by about 110,000 a month. That is a decline, not growth. Growth is going the wrong way.

 

Oh, yes $20 billion a higher taxes with very little growth in spending the government has reduced the deficit a bit. But Obama’s big lie says a rebounding economy is reducing the deficit. No, the deficit down only because of higher taxes and that is a one time event. Unless of course the government keeps raising taxes. Which apparently is exactly what Obama wants to do even though higher obviously has to reduce income growth and job creation.

 

We, our children and the rest of the world will be much better off telling the truth about what is so right now, rather then playing The Big Lie game to justify the ever strangulating growth of the US government.

 

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13 Responses to There is No Government Shutdown Nor Default Threat

  1. Pam on October 11, 2013 at 7:07 pm

    Thanks for the clarity, you’ve made the relevant facts crystal clear, as always. For whatever reason, the people attracted to leadership positions these days have no connection to the ground, and surely are not committed to the common good. It’s all about ego and lining chosen pockets. I guess we made it almost 200 years before the decline set in. 1976 only exceeds 1971 by five years. And I still have hope, but it may take a catastrophe to get our leadership to do the right things to put us back on a straight path, or so it seems. Meanwhile, I am thankful there are blogs like yours to help those of us who care to understand the big picture.

  2. Dave in Alberta, Canada. on October 11, 2013 at 9:41 pm

    Great video Charles. Sadly, government and efficiency do not belong in the same sentence, unless one is discussing the efficiency of government to squander money. Up here in Canada, we watch the theatre that is Washington. What started as a drama is now a comedy show. Thank you for your video, I always enjoy them.

  3. Chris on October 11, 2013 at 10:36 pm

    Hey Mr. Biderman,

    love the research and willingness to state the facts regardless of where they lead. In the farce we are watching around the budget, debt ceiling, and red team / blue team politics…I wrote something as an attempt to create a starting point for a dialogue amongst interested but mostly un-informed Americans – glad to know your opinions (please correct, amend, whatever) but wish there was some forum for a shared understanding rather than taking sides. I think people have no context to even begin caring right now…so here goes…cause good governance starts with an informed populace.
    —————————————————-
    American Citizens cheat sheet to our nations finances…

    -US GDP (sum of all US economic activity upon which taxes are raised) is $16 T (Trillion) (btw this =$16,000 billion) and growing @ 2%’ish

    -US Federal Government Treasury debt is $17 T and growing @ 8%’ish

    If this debt continues growing dramatically faster than economic growth (and the tax base to pay for it)…the government (via the Feds QE…Quantitative Easing or the Fed’s policy since ’09 of buying Treasury’s and mortgage debt w/ newly created money) will be forced to continue printing money (dilute existing holders of money) to make up the difference. Note that the Federal government does not pay off our Treasury debt but rather only rolls over (re-sells) our existing debt along with our newly issued debt. Thus, the amount of debt is increasing exponentially while the economy is growing in a linear path (ie, since ’07 public Treasury debt has increased by 125% while the economy has incease @ 10%).

    Please consider the following, so a basis for discussion exists:

    Quick breakdown of Federal Treasury debt:

    -$5 T is intragov Treasury debt owned by Social Security and other government functions…the government holders roll this over so no worries there so long as SS receipts are greater than benefits…discussion for another day.
    - $12 T public outstanding debt (active Treasury’s in market place)
    - Quick Defiinition of Treasury debt…Treasury Bills or T-Bills less than one yr. duration – Notes intermediate duration – Bonds / TIPS 10yr plus duration
    - $7.8 T in T-Bills (Fed owns basically zero)
    - $4.2 T in Notes / Bonds (TIPS) (Fed owns $2.2 T or 50%’ish of all medium / long term debt)
    - Fed buys $45 billion monthly ($540 Billion annually) of Treasury debt (notes/ bonds) and that amounts to about 150% of Treasury’s issuance meaning Fed buys essentially all new plus most if not all rollover debt
    - At this rate Fed will own 70% (it’s own rule for the max amount of every issuance it can own) of all Notes / Bonds (TIPS) within about a year (at current QE and current Treasury issuance)…this means Fed is buying virtually all outstanding intermediate / long term US debt.

    - This also means all $5 T of foreign held Treasury debt (China / Japan, etc.) has essentially moved from a mixture of short/med/long debt to only the shortest duration T-bill market

    The takeaway is that the Fed has ensured there will never be an intermediate or longer dated interest rate spike (no bond vigilantes or market based sell-offs based on US policy)…but it also means Congress and the President have no pressure or penalty for not coming to compromise or prioritizations of spending and taxation. This means that the US is incredibly vulnerable to a short term T-bill exodus that the Fed would be incapable of covering without increasing QE (bond buying) radically…This is the danger to the currency that the Fed will increase it’s balance sheet to own in essence 70% of all marketable debt.

    The implications for the dollars purchasing power is very precarious as this is threatening to skyrocket the money supply and thus a potential sudden and dramatic loss of standard of living for Americans.

    Thanks for reading and hopefully deeper discussions than which political party will win will occur.

    • Chris on October 14, 2013 at 10:22 pm

      Seems the real threat isn’t a shut down but an economic pick up. Based on US Treasury cumulative blended interest rates through recent history (bills, notes, bonds) – here is the interest we would pay now with our current $17 trillion debt based on those rates…

      1980 – 15%…$2 T 550 B
      1990 – 7.8%…$1 T 326 B
      2000 – 6.4%…$1 T 88 B
      2007 – 4.8%…$816 B
      2013 – 2%…$350 B actual…actual 2013 tax revenue $2.7 T

      Guesses for ’15 interest rate??? Japan currently pays 0.66% on 10yr debt w/ a blended interest rate about the same 0.6%>>> It’s not just the Japanese school girls that set all the fashion trends…it’s the Japanese CB that is the leader to the bottom

      Or another way to think about it, any increase in economic activity (say a 3.5% jump in GDP) would increase economic activity by $560 B but the increase in taxes would be @ 20% of that or $110 B…the paralell rising interest rates to say 3.5% would raise interest costs to $600 B…a net deficit increase of $140 B. One step forward economically would create two steps backward budgetarily (hello Reinhart and Rogoff).

      Seems money supply must continue growing, interest rates must keep declining, and GDP must remain very anemic to allow to go on. Don’t know if the Fed never intended for us to get better as that would be worse than remaining sick or tried and failed???…Perhaps it’s time we all brush up on our Japanese…

      • black dog on October 15, 2013 at 2:22 pm

        Chris, nice post but a few things.

        1) FY2013 interest expense $416 billion
        http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

        BUT the real focus is

        2) net interest expense (debt held by public). A lot of interest paid is to govt trust funds (think social security among others). CBO (in may) projected $223 billion for FY2013 (page 8)
        http://cbo.gov/sites/default/files/cbofiles/attachments/44172-Baseline2.pdf

        3) and don’t forget Federal Reserve is returning profits from Treasuries held to US Treasury ($75 billion for FY2013, but that includes mbs interest, as well).

        • Chris on October 16, 2013 at 7:15 am

          Hey Black Dog – all good points and thanks for keeping my numbers on the up and up…one point I must quibble w/ Mr. Biderman though…

          He and many others make the claim a default is impossible due to relatively simple payments of the treasury debt from tax revenue. BUT, this makes a gigantic assumption that fiduciaries holding T-bills will continue to roll over rather than redeem? And Note and Bond holders likewise…as per ZH, $441 Billion in maturities Oct 18 – Nov 15…and that is where a true default or a Fed QE-palooza becomes a real choice (assuming politicians continue to play this out).

          • Chris on October 16, 2013 at 7:38 am

            one more point – interest payable may also be rising very rapidly (particularly in the T-bill market…as recently as late Sept 1mo was yielding .003%…and now .41% and the rollover for all 1mo debt to the new higher yield is, you guessed it, 1mo) and eat up far more tax revenue than anticipated…so rather than $30 billion we could be jumping and adding that to non-rollovers consuming far more cash than typically required in a non-event environment…$40+ billion in interest costs plus even a $50-100 billion non-rollover and suddenly the Fed’s are feeling very uncomfortable trying to run a federal gov on $40-$90 billion or so? This is how panics start…

  4. atakante on October 12, 2013 at 12:09 am

    Hi Charles-
    Long time follower here. What do you think about Ray Dalio’s “Beautiful Deleveraging’ argument? His paper sounds pretty convincing in shedding a positive light to what Bernanke and crew has been up to. Would you argue that Fed should not have intervened and let the markets find its natural bottom even if it means many businesses being closed and millions of jobs being lost. In other words, what is a VIABLE alternative short of Fed intervention?

  5. black dog on October 13, 2013 at 10:38 am

    But Obama’s big lie says a rebounding economy is reducing the deficit. No, the deficit down only because of higher taxes and that is a one time event.

    a couple of other shenanigans going on to bring deficit down. For FY2013 Federal Reserve returned to US Treasury $76 billion in profits and GSE paid $96 billion in dividends to same (cute they made $14 billion on sept 30th … last day of fiscal year … to make deficit better)… longterm, both these sources will dry up as source of revenue for treasury.

    https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=13093000.pdf

  6. Eduardo Carvajal on October 13, 2013 at 10:45 am

    Well said. Thanks …. Eduardo

  7. Stephen Allan on October 14, 2013 at 12:19 pm

    Brilliant video and writing Charles.

    So the “shutdown” is just more smoke and mirrors to let them raise the debt. I also think it is a diversionary tactic to deflect attention away from the implementation of “Obamacare”. Obamacare will be like another income tax in the long run.

  8. Scott on October 18, 2013 at 2:43 pm

    I appreciate the article and responses. I don’t see your posts on YouTube anymore. I agree with many comments but think the real problem was the inability to add debt which would had resulted in a monthly cut of $63bn- that’s my best estimate. Therefore, in reality Republicans couldn’t stomach that big of a cut, and it would had been significant, but the deficit problem will never go away based upon past behavior. The American people talk as if they want solutions but they won’t stomach the cuts necessary to START reducing debt dependency. No hope using proposed models for change. At no time in history have the masses changed anything except to drive things into the ground.

  9. Ed_B on October 19, 2013 at 11:35 pm

    It is pretty clear to many of us not in the government that the primary problem with the US economy consists of a toxic overdose of government. Government is too big, too expensive, and tries to do too much. The shear size of government is smothering the economy and those who create it. We have WAY too many laws, rules, regulations, permits, and taxes. No one is government can or will see this, however, and the drum beat for ever more spending and ever more bureaucracy continues unabated. I could be wrong about this but was this not one of THE major problems in the USSR that led to their complete economic collapse? If so, it is likely to do the very same here.

    Because of all this, it is not getting better on Main St. where most of us live. Wall Street is doing fine, thanks to the orgy of money printing, AKA QE, and the inflationary effect that is having on stock prices and most real goods.

    The answer is simple. We need about 1/2 of the government that we have. A real leader in the White House would call in all of his department heads and require them to submit a 2-page report in 30-days or less on how they would reduce their department size and spending by 50% over the next 12 months. This would be tough to do, no doubt, but these people are always telling us how skillful they are and what a great job they are doing as they plunder the US Treasury and indenture multiple future generations of future American citizens. Perhaps it is time for them to actually EARN those accolades?

    Yes, taxation without representation is not supposed to happen in the US but it happens all the time via the politicians favorite route; which is rewarding today’s voters with spoils from the wallets of tomorrow’s voters. The cute part is that tomorrow’s voters cannot vote today to stop this robbery-in-progress, either because they are too young or they haven’t even been born yet… but they are indentured nonetheless.

    Added on top of all this is a political system that rewards congress-critters for “bringing home the bacon”, which is to say the local folks share of the federal budget pork, while failing to reward those who keep government effective and efficient. Saving money is a no-no. Any money left over at the end of the fiscal year is NEVER returned to the US Treasury. It is spent whether or not that spending is necessary. Bureaucrats are terrified that if they do not always spend more, they will end up getting less next year. No one seems to be able to figure out that some costs are variable and that the same amount of spending per year is not always necessary to meet the goals of each department.

    It would be good if those with sufficient intelligence and knowledge could figure this out for our fearless leaders because it is becoming more and more obvious that they cannot. Those who could are likely too busy preparing for the financial and economic collapse that they clearly see is coming because it is not be addressed in any way whatsoever, let along badly. Borrowing and spending to infinity seems to be the answer from the politicians. The problem with that is that while our creditors are patient, their patience is unlikely to be infinite. At some point, they WILL stop loaning all deadbeat countries any money. When that happens, the music will stop and everyone without a chair will be well and truly $crewed.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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