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US Budget Deficit Hits$607 Billion In 9 Months,As Spending On InterestExplodes

by Tyler Durden

Thu, 07/12/2018 - 15:31

4SHARES

The US is starting to admit that it has aspending problem.

According to the latest Monthly TreasuryStatement, in June, the US collected$316BN in receipts - consisting of$162BN in individual income tax, $94BNin social security and payroll tax, $3BN incorporate tax and $22BN in other taxesand duties- a drop of 6.6% from the$338.7BN collected last June and areversal from the recent increasingtrend...

... even as Federal spending also dipped,down 8.8% from $428.9BN last June to$391.1BN last month.

... where the money was spent on socialsecurity ($88BN), defense ($65BN),Medicare ($79BN), Interest on Debt($32BN), and Other ($126BN).

This resulted in a June budget deficit of$75 billion, better than the consensusestimate of $98BN, and an improvementfrom the $147 billion deficit in May andas well as slightly less than the deficitof $90.2 billion recorded in June of2017. This was the second biggest Junebudget deficit since the financial crisis.

The June deficit brought the cumulative2018F budget deficit to over $607BNduring the first nine month of the fiscalyear, up 16% over the past year; as areminder the deficit is expect to increasefurther amid the tax and spendingmeasures, and rise above $1 trillion.

Most Wall Street firms forecast a deficit forfiscal 2018 of about $850 billion, at whichpoint things get... worse. As we showed Ina recent report, CBO has also significantlyraised its deficit projection over the 2018-2028 period.

But while out of control governmentspending is clearly a concern, an evenbigger problem is what happens to notonly the US debt, which recentlysurpassed $21 trillion, but to the intereston that debt, in a time of rising interestrates.

As the following chart shows, USgovernment Interest Payments are alreadyrising rapidly, and just hit an all time highin Q1 2018.

Interest costs are increasing due to threefactors: an increase in the amount ofoutstanding debt, higher interest ratesand higher inflation. A rise in the inflationrate boosts the upward adjustment to theprincipal of TIPS, increasing the amount ofdebt on which the Treasury pays interest.For fiscal 2018 to-date, TIPS’ principal hasbeen increased by boosted by $25.8billion, an increase of 54.9% over thecomparable period in 2017.

The bigger question is with short-termrates still in the mid-1% range, whathappens when they reach 3% as the Fed'sdot plot suggests it will?

* * *

In a note released by Goldman after theblowout in the deficit was revealed, thebank once again revised its 2018 deficitforecast higher, and now expect thefederal deficit to reach $825bn (4.1% ofGDP) in FY2018 and to continue to rise,reaching $1050bn (5.0%) in FY2019,$1125bn (5.4%) in FY2020, and $1250bn(5.5%) in FY2021.

Goldman also notes that it expects that onits current financing schedule theTreasury still faces a financing gap ofaround $300bn in FY2019, rising toaround $750bn by FY2021, and willthus need to raise auction sizessubstantially over the next couple ofyears to accommodate higher deficits.

What does this mean for interest rates?The bank's economic team explains:

And here a problem emerges, becausewhile Goldman claims that "the deficitpath is known to markets, but academicresearch suggests these effects might notbe fully priced immediately... the balancesheet normalization plan is known too,but portfolio balance effect models implythat its impact should be gradual" thebank also admits that "the precise timingof these effects is uncertain."

What this means is that it is quite likelythat Treasurys fail to slide until well afterthey should only to plunge orders ofmagnitude more than they are expectedto, in the process launching the biggestVaR shock in world history, because as areminder, as of mid-2016, a 1% increasein rates would result in a $2.1 trillionloss to government bond P&L.

Meanwhile, as rates blow out, US debt isexpected to keep rising, and somehowhit $30 trillion by 2028...

... without launching a debt crisis in theprocess.

2276 !! 12 "

Comments

lnardozi

Spike those interestrates, FED bitchez!Bring on theAcrapolypse!

American Psycho #lnardozi

but but but higherinterest rates meansthe economy isstrong. So byextension, higherinterest paymentsmust be bullish. This is what MSNBCtells me. Nowexcuse me, I need togo buy some TESLA.

Boing_Snap #American Psycho

ff

directaction #Boing_Snap

Ha Ha Ha!!!

Seasmoke # lnardozi

Got Gold ????

FreeShitter #Seasmoke

Got guillotines?

jm

The next recessionwill be real rough oncredit, 'cuz peoplestill gonna buy govpaper.

Bay of Pigs # jm

People? LOL. No, theFED will monetize thedebt.

See Japan...

June 12 1776

Ut oh! No duh! Themathematicallyperfected, wealthtransfer and thePeople's wages &Treasury plunder ofthe Olde World Order,American GlobalistWorld Reserve PaperDebt system. MAFFA!Make American FiatFraud Free Again!1694-1766-1913

Mittens is a god

This is not TrumptardBoner material.

TacticalTrading

Just buy FANG. It is the can't losetrade because "they"can't let it go down

Stupid Valuation...Since when has thatever mattered

Balance-Sheet

Fed needs topurchase more assetsat the rate of 70-80Ba month to full thisgap. Net financingcosts to the USTshould be slightlyless than zero.

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Fly to Myrtle Beach

The increase in Treasury issuanceand the ongoing unwind of QEshould put upward pressure onlong-term interest rates. Onissuance, the economic researchliterature suggests as a rule-of-thumb that a 1pp increase in thedeficit/GDP ratio raises 10-yearTreasury yields by 10-25bp.Multiplying the midpoint of thisrange by the roughly 1.5ppincrease in the deficit due to therecent tax and spending billsimplies a 25bp increase in the 10-year yield. On the Fed’s balancesheet reduction, our estimatessuggest that about 40-45bp ofupward pressure on the 10-yearterm premium remains.

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