A Scam to
Make Soaring Budget Deficits Look Smaller
By Victor
Sperandeo with the Curmudgeon
Backgrounder on U.S. Budget Deficits:
Deficits did matter in the 1980s under President
Reagan, as increasing U.S. budget deficits created a fear that the private
sector would be crowded out by massive government borrowing. Bond vigilantes would go on a buyers strike
to force the federal government to lower budget deficits and resulting
borrowing.
Modern Monetary Theory (MMT) came along in the early 1990s to suggest the government can
create more money without any consequences as its the issuer of the currency
(in this case, the U.S. dollar the worlds reserve currency). That was followed by the Federal Reserves QE
programs (starting in November 2008) to buy most of the newly issued U.S.
government debt. Hence, budget deficits
were no longer a concern for financial markets or the U.S. economy.
U.S. Budget Deficits Skyrockets while GDP is
Positive:
In the first six months of fiscal year 2023, the
United States borrowed $1.1 trillion, with a $376 billion deficit in February,
according to the latest Monthly Budget Review from the Congressional Budget Office
(CBO). Maya MacGuineas,
president of the Committee for a Responsible Federal Budget said, Only halfway
through the fiscal year and weve already borrowed $1.1 trillion a massive $6
billion per day. Yet lawmakers have done little to write a budget and figure
out a plan for how to slow this endless flow of borrowing.
This reality of the six-month deficit being $1.1
trillion, assumes another $1.1 trillion deficit from April to September. This
is occurring as the U.S. economy, measured by real GDP, is still growing.
Its critically important to note that as the U.S.
economy goes into recession (as Fed economists now forecast), budget deficits will
greatly increase as tax revenues decline and transfer payments increase.
Curmudgeon Note:
A recent IRS ruling will widen the budget deficit from January
1st to October 15, 2023. Disaster-area
taxpayers in most of California and parts of Alabama and Georgia now have until
Oct. 16, 2023, to file various federal individual and business tax returns and
make tax payments.
The Oct. 16 deadline also
applies to the estimated tax payment for the fourth quarter of 2022, originally
due on Jan. 17, 2023. This means that taxpayers can skip making this payment
and instead include it with the 2022 return they file on or before Oct. 16, 2023
estimated tax payments, normally due on April 18, June 15 and Sept. 15, as well
as quarterly payroll and excise tax returns normally due on Jan. 31, April 30
and July 31 are now due on Oct. 16.
ΰWithout tax revenue from disaster
area taxpayers until Oct. 16, the budget deficit from January 1 to Oct. 15 will
increase more than previously forecast.
Is the National Debt Sustainable?
U.S. national debt is growing at 7.65% annually from
2000 to date! The debt is growing more than 4.32 times real GDP using the CPI
(which is 20 bps higher than the GDP deflator)1.
Note 1. From 2000 to now (last
23 years), the real GDP growth annual average rate was 1.97% using the GDP
deflater, while Nominal GDP was 4.31%. But using the CPI, real GDP grew at a
lower rate of 1.77%.
This is obviously unsustainable. However, a
government with a printing press (aka Fed keystroke entries) may be able to
extend the national debt beyond the rationally obvious?
A New Misleading Concept Primary Deficit
To evaluate the governments fiscal situation,
analysts typically reference the total budget deficit the gap between total
federal spending (which includes interest on the national debt) and revenues. Now the CBO has come up with a new concept
to make it appear that the budget deficit is smaller than it actually is.
The CBO released a major report in February titled, The
Budget and Economic Outlook 2023-2033. It states that their
baseline budget projections are meant to provide a benchmark that policymakers
can use to assess the potential effects of changes in policy; they are not
intended to provide a forecast of future budgetary outcomes.
The cumulative deficit for the 20242033 period is
projected to total $20.2 trillion, or 6.1% of GDP. Since 1973, the annual
deficit has averaged 3.6% of GDP. In CBOs projections, deficits equal or
exceed 5.5% of GDP in every year from 2024 to 2033. Since at least 1930,
deficits have not remained that large for more than five years in a row.
CBOs projection of the deficit for the full year of
2023 was $1,410 trillion (Page 6 Table 1.1). However, the CBO added a new line
item called PRIMARY DEFICIT, which is defined as: the deficit
without counting the interest the government pays on its debt.
Primary
deficits deficits excluding net outlays for
interestincreased from 2.9% of GDP in 2023 to 3.4% in 2024 and 2025 in CBOs
projections.
This is a new and misleading concept to convince the
media and novice analysts that the U.S. budget deficit is not rising due to
higher interest rates. Yet higher interest rates the government pays on its
debt will greatly increase the real budget deficit. Whos kidding whom?
This graph from the Peterson Foundation tells the true story:
Market Comments:
Critical for the Feds future agenda is Gold not
moving up above $2000, and the U.S. Dollar index (DXY) staying above 100. These
price levels must be watched closely.
Any move above or below the stated levels will mean a significant event
is occurring.
Gold does best when GDP is decreasing, along with the CPI and
corporate earnings, as that portends the next steps for the Fed will be
easing!
Therefore, I still believe long Bonds, Gold, and Silver, while short stocks are the
best portfolio for a recession, which
I believe will begin this quarter.
The markets currently assume a +25 bps increase in
Fed Funds to be announced after the FOMC May 3rd meeting. That
+25-bps rate hike is now fully discounted with a 98.4% probability according to
CME Fed Funds forecast tool.
ΰThat rate hike will reinforce the recession and add more
firepower to this portfolio.
.
Sidebar: Earnings Estimates coming down but still too
high!
The NY Times notes that the outlook for corporate
profits has swiftly deteriorated. Wall Streets forecasters expect that S&P
500 profits in the first three months of 2023 fell almost 7% from a year
earlier, according to estimates collected by FactSet. That would be the second
consecutive quarterly decline, and the biggest since a severe though brief
slump in the early days of the coronavirus pandemic in 2020.
Continuing worries about inflation followed by bank
failures in March have soured the outlook for corporate profits, which are a
major driver of stock prices. Businesses
have also told investors to dial down their expectations, with 78 companies in
the S&P 500 offering guidance about their results that are below the
average Wall Street estimates.
2023 EPS estimate for the S&P 500 remains $200, which
is 9% below consensus estimates,
according to B of A Global Research.
Despite a big downward revision in consensus estimates (-13%) since last June, B
of As Savita Subramanian thinks they still look too optimistic with the U.S. headed
for a recession.
B of A analysts are watching tech spending, which
they expect to decrease. They estimate about 20% of IT spending is from the
Financial Services sector, which is now looking to shore up capital in the wake
of the March turmoil in the banking sector.
B of A: 2023
consensus EPS is falling off the cliff, -13% since June 2022 S&P 500
historical FY2 EPS revisions vs. 2023 consensus EPS (2023 as of 4/9/23)
Source: BofA US Equity & Quant Strategy, FactSet;
Note: historical average based on 2001-2022
.
Conclusions:
Do you trust
the U.S. government?
As the great comedian George Carlin said, The
quality of our thoughts and ideas can only be as good as the quality of our
language.
The so called Primary
Deficit is not an accurate measurement of U.S. fiscal health. It is totally misleading! This manipulation is to
fool the public at large.
When the recession kicks in, the deficit will be $3
trillion for fiscal 2023 on September 30th fiscal year end.
End Quote:
The words of the Billy Joel song Honesty should be read by the CBO leaders
and government officials:
If you search for tenderness, it isn't hard to find.
You can have the love you need to live. But if you look for truthfulness You
might just as well be blind. It always seems to be so hard to give. Honesty is
such a lonely word. Everyone is so untrue. Honesty is hardly ever heard. And
mostly what I need from you. I can always find someone to say they sympathize.
If I wear my heart out on my sleeve. But I don't want some pretty face to tell
me pretty lies. All I want is someone to believe. Honesty is such a lonely
word. Everyone is so untrue. Honesty is hardly ever heard. And mostly what I
need from you.
Billy Joel is an American singer, pianist, voice actor and songwriter.
.
Be well, stay healthy, wishing you peace of mind.
Please email the Curmudgeon (ajwdct@gmail.com) if you have any comments,
questions, or concerns. Till next time
...
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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