U.S. Treasury borrows $420 billion each month

Piercing though the debt ceiling

The U.S. government (like many others) runs a budget deficit.

That means it spends more than it receives from taxes and other revenue.

But it has to pay salaries to government workers and defence forces as well as social security and interest on the debt, so it uses debt to paper over the gap.

And in an attempt to have some semblance of control over that debt (probably a good thing given the drunken sailor attitude of the current crew) it imposes, periodically, a limit on how much debt the government can stack up.

That mechanism is called the debt ceiling.

The ceiling was suspended

You might also recall in December 2021 when the then debt ceiling ($28.9 trillion) had expired, a last-ditch attempt to increase it was successful and the ceiling was raised by $2.5 trillion to $31.4 trillion, the new level.

But that level was reached pretty quickly in the June just gone, with borrowings over that period averaging $130 billion per month.

Problem is that no new ceiling could be agreed and in June of this year, the ceiling was suspended.

Er, how does that work?

Well, as part of the overall solution, Treasury announced a “debt issuance suspension period” during which, under existing law, it could take well-established “extraordinary measures” to borrow additional funds without breaching the (suspended) debt ceiling.

In other words, the ceiling has no ceiling if Treasury needs to keep borrowing to keep the country running. Magic.

The rate of borrowing is about 1 Australia every 69 days

Since the suspension period started, Janet Yellen’s debtscraper has more than pierced the clouds, and now stands at $33.5 trillion and rising.

That’s already $2.1 trillion above the last ceiling in only 5 months.

What does it all mean?

  1. The rate of Government spending has increased, and the rate of new government debt creation has more than tripled and now sits at an average of $420 billion/month.

  2. The borrowing rate is roughly equivalent to borrowing almost all of Australia’s Federal debt (just under $1 trillion excluding States) every 69 days. Or borrowing 5 Australia’s - every year.

  3. It’s also roughly equivalent to borrowing a little less than Bangladesh or Singapore’s entire debt stack, or a little more than the debt stacks of Vietnam or Malaysia - every month.

  4. If the debt ceiling were to be increased by the same increment as last time, i.e., $2.5 trillion, it would be exceeded within 6 months from today. So, it seems it will need to be set a lot higher.

  5. Over the same period, i.e., since June 2022, U.S. GDP only increased by $1.6 trillion (est.) whereas Government borrowing (i.e., ex-private sector) grew by $2.1 trillion. As I’ve mentioned and proven on many occasions, debt is no longer ‘productive’ which is to say that well below $1 of GDP is produced for each $1 of debt added. Since the GFC, it’s less than 20c in the dollar when you add in private sector debt.

Debt creation is accelerating faster than GDP is being created, and although that’s nothing new, the numbers are getting big as is the interest bill.

Is this time around any different?

No and yes.

Generally, it’s not a problem given we’re talking about the world reserve currency and a Fed/Treasury tag team that since Ben Bernanke (and perhaps even Alan Greenspan) has used bond buying and ‘exigent circumstances’ monetary policy to avert a default and/or sovereign debt crisis. The Fed is basically the buyer and monetises Treasury’s debts.

But where it is a little different this time around is that Janet Yellen’s Treasury will need to:

  1. finance the $2.1 trillion (plus any new borrowings between now and the next ceiling - which you can guesstimate by adding ~$420 billion per month 😏); and

  2. refinance $8 trillion of debt that’s coming up for refinancing in the next 11 months,

at a time when official rates are 500 basis points higher than they were during the last financing cycle.

Is there demand for all that supply? And if there is, at what cost?

What now?

Yup, inflation appears to be rolling over, bond yields are softening, and risk markets are again fading the hawk and assuming Fed Chair Powell will pivot/cut the Federal Funds Rate in the near term.

On the other hand, the size of the financing requirement suggests to me that Treasury yields will need to be attractive enough (read, higher) to soak up $10 trillion plus of new supply.

So far, bond auctions have been well covered but as Treasury auctions get larger the bond market will whisper (or shout) to Treasury where it needs to be on price/yield.

Let’s see what transpires and whether China and Japan return to the plate to soak up some of that supply.

See you in the market.

Mike

Next Level Corporate Advisory is a leading Australian corporate development, M&A and capital advisor with a dealmaking track record spanning three decades. We blend finance, strategy, deep regional intel and independence to help corporate clients unlock value in their businesses and investments.

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