The US publishes the daily cashflow of the Federal government, including outstanding debt. Total outstanding debt on the 12th May 2011 was $14,256 Billion, only $40 Billion short of the limit. Today (Monday 16th May 2011) the US meets a $75 Billion Treasury Bond maturity, thereby officially breaching the debt limit. Treasury Secretary, Tim Geithner, says that with a bit of juggling they can make it last until August. Geithner announced that he will suspend payments to the Civil Service Retirement and Disability Fund, and the Federal Employees’ Retirement System Thrift Savings Plan until August 2nd, 2011. This will be reflected in the table above within “InterGovernmental Holdings”.
It goes to show that the Democrats are prepared to push the issue to the limit to maintain its own agenda.
The limit is obviously a political constraint, where the Republicans, in a game of brinkmanship, are trying to force the Democracts into deep spending cuts.
The average monthly deficit spend is about $120 billion. April is the biggest month for revenue tax collections, with the deficit “only” being $40 Billion for the whole month.
The chances of the US defaulting on their debt is minimal. By law, interest on debt securities is paid before any other expenditure. So even if there is continuing political intrangience, if the expenses like Public Service employees’ wages or unemployment benefits are not paid, the Republicans will be the likely losers.
Tax revenue is running at 15.14% of Gross Domestic Product (GDP), but expenses are running at 24.25% of GDP. The US targets 20% of GDP as taxation revenue. Australia by comparision targets 23.5% of GDP for taxation revenue. The Republicans want expenditure cuts, but don’t want tax increases. Any expenditure cuts will be a negative for the economy trying to maintain its income.
Given that the deficit chart above, I personally think that the debt limit will be increased with minimal spending cuts, and there is probably a good chance of QE 3. Quantative Easing is only shifting long term debt to short term debt, but it will give confidence to the market.
Michael Cornips
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