IN THIS ISSUE:
1. National Debt Surpassed GDP in 2011
2. Obama Deficits Double Previous Presidents’
3. Interest & Maturity on Our Outstanding Debt
4. US Joins Greece, Spain & Portugal
5. Fed Was the Largest Buyer of Treasury Debt in 2011
6. Bernanke Hints There Will Be QE3 After All
What if I told you the US national debt is now larger than our $15.1 trillion gross domestic product? It is, at $15.6 trillion and rising by well over a trillion a year for the last three years. What if I told you that the average interest rate on our national debt was down to only 2.2% as of the end of February? It was. What if I told you that even with such a low average interest rate, the government paid $454 billion in interest alone in FY2011? It did.
What if I told you that the average maturity of outstanding Treasury debt is only 62.8 months? It is. That’s less than six years. What if I told you that almost $6 trillion in outstanding Treasury debt must be rolled over in the next five years? It will. What if I told you that 71% of the privately-held Treasury debt will have to be rolled over in the next five years? That’s true.
What if I told you that the Federal Reserve Bank purchased 61% of all net Treasuries issued in 2011? It did. All other purchasers combined purchased just 39%. Staggering! What if I told you that China decreased its holdings of Treasury debt by $156 billion from July to December last year? It did, according to the Treasury Department. That’s troubling! Or at least it could be (more to follow).
OK, enough with the what if’s. The eight what if’s above give us all more than a little to worry about. It should make for some interesting discussion today. Because of the significance of the information contained in this E-Letter, I encourage you to share it with as many people as possible.
National Debt Surpassed GDP in 2011
The US national debt stands at just over $15.6 trillion as compared to the $15.1 trillion gross domestic product in 2011. This means that our national debt is now 103.3% of GDP, a feat which has not happened in the Post-WWII era. To put $15.6 trillion into perspective, this means that every man, woman and child in America owes just over $50,000 toward the national debt.
If we use an estimated budget deficit of $1.1 trillion for 2012, the national debt will have grown by just over $5 trillion in the last four years. President Obama’s supporters argue that the 2009 deficit of $1.4 trillion was not all Obama’s fault. He did inherit President Bush’s budget which included a large deficit, but Obama promptly announced his $800+ billion “stimulus” package, which ballooned the 2009 deficit up to $1.41 trillion. Here’s an interesting chart based on data from the CBO, OMB and the Treasury Department.
While it is not my intent to go political today, the facts are what they are. Our national debt is soaring out of control. The CBO says that President Obama’s proposed federal budget for FY2013, if adopted (not likely), would add another almost $1 trillion to the deficit next year. That would put our national debt at around $16.6 trillion – if the CBO is accurate.
Our mountain of Treasury debt has two components: 1) debt held by the public; and 2) debt held by various government agencies. Here’s how those two break down:
- Debt held by the public comprises securities held by investors outside the federal government, including that held by investors, the Federal Reserve System and foreign, state and local governments.
- Intra-government debt is comprised of Treasury securities held in accounts administered by the federal government, such as the Social Security Trust Fund.
Sometimes you will hear the debt held by the public referred to as the “marketable debt,” and the debt held by the government agencies as the “non-marketable debt.” There are four types of marketable Treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS) – all of which are very liquid and are heavily traded each day on the secondary market.
There are several types of non-marketable Treasury securities including Government Account Series debt issued to government-managed trust funds, State and Local Government Series (SLGS) and savings bonds. The non-marketable securities, including savings bonds that are issued to individual subscribers, cannot be transferred through market sales.
As of late March, Treasury debt held by the public was $10.8 trillion and debt held by intra-government agencies was $4.8 trillion. Total debt $15.6 trillion.
Editor’s Note: You will often see references to the national debt that only include the debt held by the public. They often imply that the debt held by government agencies should not be included in the national debt because, they say, that’s money we owe to ourselves. Hooey! The debt held by the federal agencies is real and it has to be repaid and rolled over periodically. If you read that our national debt is only $10 trillion or so, don’t buy it.
Interest & Maturity on Our Outstanding Debt
In order to fund the government, the Treasury Department periodically auctions Treasury securities with various maturities ranging from 30-day Treasury bills to 30-year Treasury bonds, with 2-3-5-7-year and 10-year Treasury notes in between. It used to be that the bulk of Treasury borrowing was done in the longer-term instruments with maturities of at least 10 years.
In more recent years, however, this trend has shifted more toward shorter-term Treasury securities. There are pros and cons to both strategies. Generally speaking, the shorter maturities are considered more risky since short-term interest rates can vary frequently. Shorter-term maturities obviously have to be rolled over much more often. That raises the risk that there might not be enough buyers when the government needs them.
Despite those risks, as interest rates have fallen significantly, especially on the short end, the Treasury Dept. has migrated to shorter-term securities, which now pay very little interest. For example, a 5-year Treasury note only pays 1% today.
Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.
On February 29, Bloomberg reported, based on data from the Treasury Dept., that the average interest rate on all of the Treasury’s outstanding debt had fallen to only 2.2% (excluding Treasury Inflation Indexed Securities). I must say, that number surprised me! (Maybe this explains in-part why President Obama wants to borrow so much money – because it’s so cheap.)
Bloomberg also reported that, as of the end of last year, the average maturity on the Treasury’s outstanding debt was only 62.8 months. That’s less than six years on average. And here’s the really scary part: the US is now in the precarious position of having to roll over 71% of the debt held by the public in the next five years! (And it gets even scarier below.)
US Joins Greece, Spain & Portugal
The US is now more dependent on short-term funding than many of Europe’s highly indebted countries, including Greece, Spain and Portugal, according to the Center for Financial Stability (CFS), a non-partisan New York think tank that focuses on financial markets.
Some argue that the US had a lot more debt in relation to the size of its economy following World War II than it does today. That may be true on a percentage of GDP basis, but the structure of that post-WWII debt was far more favorable than today due to much longer maturities. Today, only 10% of the public debt matures outside of a decade according to CFS.
CFS also calculates based on the current structure (low rates and short maturities), a 1% increase in the average interest rate would add $88 billion to the Treasury’s interest payments this year alone. With most of our debt in shorter maturities which pay next to nothing, we could easily see a rate increase of 1% or more. If market interest rates were to return to more normal levels, say 3-4%, the results would be ominous.
Again, with short rates at next to nothing, this increases the rollover risk. Lenders don’t like to put their money at risk for such low returns, especially when the borrower is spending record amounts of money it does not have. This is exactly what happened to Greece and Portugal and Argentina before them. Do our leaders just think this can go on forever?
Fed is Now the Largest Buyer of Treasury Debt
I said earlier that it gets even scarier. The Federal Reserve purchased 61% of the net Treasury issuance last year, according to the bank’s quarterly flow-of-funds report. That means we’re seeing a decline in demand from just about everyone else, including banks, mutual funds, corporations, individuals and foreigners.
In a Wall Street Journal article last Wednesday, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, stated that foreign investors like China and Japan are now shunning US debt. According to CFS, foreign buyers scooped up over $90 billion in Treasury debt in 2009. In 2011, by contrast, CFS says foreigners purchased only $13.6 billion in Treasuries.
Scariest of all, China decreased its holdings of US debt in the last half of 2011. According to the Treasury Dept., China purchased no new Treasury debt from July to December last year, thus shrinking its holdings of US debt by $156 billion in six months! China is the largest foreign holder of our debt, followed closely by Japan. Fortunately, China did buy some additional US Treasuries in January (see link in Special Articles below).
Fed intervention in the government debt market makes demand for Treasury bonds appear higher than it really is, as foreign creditors and other investors in US government debt are increasingly looking elsewhere until the government makes serious attempts to curb spending and narrow its gaping deficits.
With a shrinking base of U.S corporate and bank buyers, not to mention foreign buyers, the Treasury has had to resort to the Federal Reserve itself to make the purchases. But you don’t see this scary fact reflected in the media – they would have us believe this is simply a decision by the Fed. The Fed purchasing has not only made up for the shortfall in demand; it has also served to keep interest rates artificially low (see more on this in Special Articles below).
Bernanke Hints There Will Be QE3 After All
In my March 13 E-Letter, I argued that the Fed might well be considering additional quantitative easing (QE3), even though the prevailing wisdom at the time was that QE3 was off the table. I further argued that if the Fed was indeed considering QE3, which it knows would be unpopular, it would need to do it soon so as not to be an issue in the November presidential election.
The Fed Open Market Committee (FOMC) met on March 13. Its official policy statement afterward noted that the economy had improved somewhat, but the unemployment rate was still unacceptably high. As a result, the FOMC reiterated that it would keep the Fed Funds rate near zero until late 2014, and that it would continue “Operation Twist” (moving to longer-term Treasury holdings in its massive portfolio). The FOMC also stated once again:
“The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.” [Emphasis added.]
As I noted in my March 13 E-Letter, most of the economic growth in the 4Q of last year was due to inventory rebuilding, which has slowed significantly this year, and most forecasters now believe that 1Q GDP growth will only be around 1%. Here was my thinking on March 13:
It would not surprise me if they announce another stimulus program at either the April 24-25 meeting or the June 19-20 meeting. Perhaps the most likely scenario would play out as follows. For today’s one-day FOMC meeting, the Fed probably elects to keep all options open in its policy statement later today, just as it did in January, as discussed above... Then at the April 24-25 FOMC meeting, they could begin to get more specific as to what they might be considering in the way of more stimulus.
As noted above, my line of reasoning was widely dismissed in the financial media, primarily because Bernanke made some comments in January and February that gave the impression that QE3 was not on the table. However, in comments made in March, Bernanke seemed to be suggesting that QE3 may indeed be on the table as I suggested.
In speeches over the last month, Bernanke has emphasized that the improvement in the unemployment number has been the result of “a decline in layoffs rather than an increase in hiring.” In effect, what the Fed Chairman did was to throw a bucket of cold water on the recent declines in the unemployment rate.
The other thing Bernanke said last month, unlike previous speeches, was that the continued rise in oil and gas prices is “a major problem.” Previously, he had suggested this was only a temporary phenomenon. Some now agree with me that he may be setting the table for QE3.
Late Note: The minutes from the March 13 FOMC were released this afternoon, and QE3 was not discussed in the meeting. Many analysts took that to mean that the FOMC will not consider QE3 in the months just ahead. The stock markets reversed lower soon after the minutes were released as many investors apparently concluded QE3 is once again off the table.
However, if you read the minutes carefully, you will see that the FOMC clearly left the door open to additional stimulus going forward if the economy starts to sag:
“The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.”
So in my view QE3 is still on the table, especially if upcoming economic data is disappointing. Bill Gross of PIMCO happens to agree with me:
Now, let’s look at the timeline. The next FOMC meeting is on April 24-25. Our first look at 1Q growth doesn’t come until April 27. So, I doubt the FOMC will announce QE3 (or an extension of Operation Twist) in the April 25 policy statement. However, it won’t surprise me if the subject of more stimulus is discussed at the April 24-25 meeting. But we won’t know that until the minutes of the April meeting are made public around May 15.
The bottom line is, I think it’s still possible that the Fed could announce QE3 (or maybe an extension of Operation Twist) at the end of the June 19-20 FOMC meeting. The US stock markets had their strongest 1Q in more than a decade over the last three months – at a time when most people thought QE3 was off the table.
It remains to be seen what will happen just ahead if the perception changes to QE3 being back on the table. I’ll keep an eye on all this and will keep you posted as we go along.
Finally, let me encourage you to share today’s E-Letter with as many people as you can. Some of the facts in today’s letter are not disclosed in the mainstream media, so we need to get the word out.
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Very best regards,
Gary D. Halbert
"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."
Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.
04-03-2012 4:38 PM
Gary D. Halbert