Maybe compounding interest isn't a problem

 Read: https://www.msn.com/en-us/money/savingandinvesting/a-bond-doom-loop-should-mean-that-yields-rise-with-more-borrowing-but-history-says-the-opposite/ar-AA1k6e4V 

A bond 'doom loop' should mean that yields rise with more borrowing — but history says the opposite Story by fdemott@insider.com (Filip De Mott)

"But just as increases in corporate defaults tend to be sparked less by looming debt maturities and more by collapses in earnings, so fiscal crises in bond markets tend to be driven less by the inevitability of compounding interest payments and more by sudden collapses in credibility, currency runs and imported inflation," he said.

Also:

https://www.ft.com/content/d5c99487-11e1-4a68-aece-5a26f65dea7f

The third reason why large deficits are not associated with high bond yields is that, contrary to intuition, most borrowing is much closer at a system level to being self-funding than is widely recognised. You don’t need to work in an investment bank’s syndicate department to see the intrinsic logic in the statement that “someone needs to buy” each bond issue. Usually this involves a private investor withdrawing deposits from their bank account. But take a moment to consider the process as a whole. Provided the proceeds from the bond sale are at some point spent in the real economy, they produce an increase in bank deposits which exactly offsets the amount the private investor drew down for the purchase. Total bank deposits — or narrow money — are left unchanged.

October 2023 deficit was $67 billion; $105 billion missing

 The Treasury just issued their monthly treasury statement for October 2023 here: 

https://www.fiscal.treasury.gov/files/reports-statements/mts/mts1023.pdf

Key points:  1. the deficit was $66.564 billion; 2. net interest was $76 billion; 3. defense spending was $87 billion; 4. education spending was $22 billion.

Overall, this is a better month than most but this is because the Treasury Department gets a lot of tax revenue in October because it is following the end of the September 2023 quarter.

But here is the puzzling thing for me.  The debt to the public at the end of September was $26.330 trillion. At the end of October it was $26.576 trillion, for an increase of $246 billion for the month.  The Treasury account checking account at the Fed at the end of September was $679 billion and at the end of October it was $753 billion for an increase of $74 billion.

So the Treasury borrowed $246 billion, of that money it used $67 billion, and it saved $74 billion.  Where did the other $105 billion go?  Maybe I can ask Catherine Austin Fitts to look into it.

Does this happen every month?  Maybe I can go back and look at September when I have time.

 =====================================

So I looked at September 2023 and there is extra money.  The treasury borrowed $286 billion in September, the deficit was $166 billion, and the Treasury General Account increased by $178 billion.  So we have the opposite problem - where did $58 billion magically appear from?

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I was thinking that maybe it offset a change in the Social Security Trust Fund balance or something.  But if you look at the national debt as a whole, the problem is even worse.

On 9/30/23, the total national debt was $33.167 trillion.  On 10/31/23, this jumped to $33.700 trillion.  So the debt increased by $533 billion.  The monthly deficit was $67 billion and the general account increased by $74 billion.  So where did the other $392 billion go?  Accrued interest you say.  So yes there was accrued interest on 10/2 of $266 billion ($7.103 tn - $6.837 tn).  But there is still $126 billion missing.  Where did it go?

 ======================

Update:  On 10/31/2023 the total national debt was $33.7 trillion.  One year earlier on 10/31/2022, it was $31.238 trillion.  So it increased 7.9% in one year.

When will the next recession begin?

Recessions are officially called by the National Bureau of Economic Research; however, they won't tell us when a recession begins until the next recovery is well under way, so they are no help.  But there is one indicator that I think is very precise.  When the Fed cut rates, that is when the recession begins.  

In 2007, the Fed did their first rate cut on September 18, 2007 of 50 basis points, and the recession began in December 2007.  So this was a leading indicator of 3 months.

Now, the Fed will likely do the first rate cut in March 2024, so the recession will start about June 2024.  

But, you object, the Fed cutting doesn't mean a recession is coming.  I think it does, because the Fed has access to all sorts of private data that we don't, and when they cut they are reacting to the weakness that they see.  

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See also: https://nymag.com/intelligencer/2023/10/how-the-bond-market-is-screaming-danger-for-the-economy.html

You don’t really need to know a lot about the economy or bond market to know that there’s one signal that investors live in fear of more than just about any other. It’s called the inverted yield curve — which just means a flippening of sorts in the relationship between long-term and short-term U.S. government bonds.  The phenomenon defies easy logic, but it has consistently predicted every recession for more than a half century.

There’s an interesting phenomenon with the yield-curve inversion now, which is that it’s starting to disinvert — which is to say, go back to a normal shape. In your model, what’s the significance of that?  So the average lead time from an inversion to a recession, over the past four, is 13 months. So we’re not even at the average yet — it’s way too early to say that it’s a false signal. But more importantly, you look at the past four recessions, and before the recession begins, every single time, you see the uninversion happening or whatever the word is. The steepening occurs before the beginning of the recession. So this is exactly what you’d expect.

Yes, “the bear steepening,” as people call it when the long end of the curve rises and the inversion ends. If that is happening now, when do you expect a recession?  I expect first quarter or second quarter of next year.  [Note: This is anytime from January through June of 2024].

Why is the debt increasing more than deficit spending?

 One of the assumptions that I make in trying to predict the future debt level is that the debt will increase each year by the deficit for that year - it seems only logical.  But in fact the debt is increasing more than is needed to cover the deficit.  Let's look at the last 2 fiscal years.

In fiscal year 2022 (ending 9/30/22), the official deficit was $1.375 trillion.  However, this includes student debt relief of $379 billion that was struck down by the Supreme Court.  So the actual deficit was right at $1 trillion.  

Now compare this to the amount on the nation's credit card.  On 9/30/21 the debt to the public was $22.283 trillion.  On 9/30/22, this was $24.299 trillion, which is an increase of $2.016 trillion. What was the extra $1 trillion for?

Oh, you say, look at the balance in the checking account at the Fed.  On 9/30/21, the balance in the checking account was $215 billion.  The same account on 9/30/22 had $636 billion in it. So yes the balance did increase about $400 billion, but that doesn't explain the other $600 billion.

Now look at fiscal year 2023, which ended 9/30/23.  The official deficit was $1.69 trillion but you have to add in the student debt relief of $333 billion, to get an adjusted actual of right at $2 trillion for 2023.  The debt to the public on 9/30/23 was $26.33 trillion, which is right at $2 trillion more than 1 year earlier.  So this almost matches.  And the Treasury checking account at the Fed had $679 billion in it, which increased slightly from the previous year.  

So there is an anomaly with the FY 2022 data.

What about going forward?  As I already pointed out, in FY 2024 the Fed is on track to issue more than $3 trillion of new debt in excess of that needed to repay the existing debt, and this is $1 trillion more than is needed for the deficit.

Is this an ongoing problem, where the debt goes up $500 billion to $1 trillion more each year than the deficit?  Is so, what will this do to the debt projections?

To dramaticize this, I think a marketable debt total of $40 trillion is a significant event.  When will this occur?  According to the CBO projections, this should happen sometime in 2030. But if the debt goes up $1 trillion more than the deficit each year, I think the $40 trillion level could happen earlier, maybe 2028. 

It feels like something has change regarding the debt trajectory, and that we are facing a $2 trillion plus deficit in 2023 and $3 trillion plus in 2024 and later.  Hopefully this is not the case, but it seems like things are spiraling out of control ahead of schedule.

Treasury Financing Schedule

 I find this interesting for some reason.  First, realize that the Treasury distinguishes between "bills" which have a duration from 4 to 52 weeks and financial instruments which are longer than one year, including "notes" (which are 2,3,5,7 or 10 years), "bonds" (which are 20 or 30 year), "FRNs", floating rate notes (which are usually 2 years), and "TIPS" - Treasury Interest Protected Securities, which are usually 5 years.

Excluding the bills, these are the auction dates:

4th quarter of 2023: 11/15 ($114 bn) , 11/24 ($24bn), 11/30 ($180 bn), 12/15 ($110 bn), 12/29 ($44 bn)

1st quarter of 2024:  1/2/24 ($168 bn), 1/16/24 ($122 bn), 1/31/24 ($220 bn), 2/15/24 ($125 bn), 2/23/24 ($26 bn), 2/29/24 ($195 bn), 3/15/24 ($121 bn), 3/28/24 ($16 bn)

You could look at these schedule and project them to the end of the fiscal year and probably be correct.  They are pretty predictable.

About 2/3 of the money raised will go towards paying off maturing debt.  But this still doesn't explain what they need all of the money for.  They have already increased the balance of the Treasury checking account at the Fed, they are using a lot of money to pay off maturing notes and bonds, they will be financing deficit spending, and there still a lot more money that that they are raising that they haven't explained.  Where will it go? A) to increase the balance of the checking account even more, B) to cover deficit spending including interest, which is higher than anticipated, or C) some other reason they haven't explained.  My guess is B, that the deficit will be higher than anticipated, but we will see.

M5 as of September 30 2023

 M5 is a formula I came up with a few years ago to measure the money supply.  I think I named it so it wouldn't conflict with other measurements.  Anyways this is the current calculation:

M5 As of 9/30/2023:

M2 (as of 9/30/23) = 20,754.9

Public Debt (as of 9/30/23) = 26,330.1

Less Fed Held = -4,900.1

Total = 42,184.9

The first time I did this calculation was about 10 years ago and the number was 20,561.8.  So it has more than doubled since then.

Will there be a $3.3 trillion deficit in FY 2024?

 Read this: Marketable US Treasury Debt to Explode by $2.85 Trillion in the 10 Months from End of Debt Ceiling to March 31, 2024 | Wolf Street

So the Treasury has already replenished its bank account in Q3 2023 with $600 bn of the $1 trillion issued. They are keeping a $750 billion cash balance.  But they are still planning on selling massive amounts of new debt:

Q4 2023 $776 billion

Q1 2024 $816 billion

Q2 2024 $850 billion (my projection)

Q3 2024 $900 billion (my projection)

Total  $3,342 billion.

What do they need all that money for?  We already know the projected spending.  The primary deficit should be about $1 trillion in FY 2024.  And net interest should be about $800 billion.  So I don't understand why they need more than about $2 trillion in new debt.  

Even just looking at the first quarter, the deficit will be about $450 billion.  So why are they selling $776 billion in new debt, especially at these high rates?  What is the extra $326 billion for?

This doesn't make sense at all.  We will find out soon enough.

Update (2/6/24):  The Treasury will need only $202 billion in the April-June 2024 quarter, so I was way off in this post.

As for the other question I raised about Q4-2023, the actual deficit was $509 billion for the first quarter of FY 2024.  And it looks the like net debt to the public increased by $608 billion (from $26.330 trillion to $26.938 trillion) so there is "only" $99 billion extra, which is almost a rounding error in Washington these days.  

And if in Q3-2024 they borrow $600 billion to cover the expected deficits (not the $900 billion is mentioned above), that would mean the total borrowing in FY 2024 is about $2.4 trillion (not $3.3 trillion), and the total deficit in FY 2024 will be about $2.1 trillion, which will be the second-highest ever, after the pandemic FY 2021 (which had a $2.8 trillion deficit).

What is the value of a treasury bond?

 How would you measure the intrinsic value of a treasury bond?  So here is my idea.  Assume that 10% of all future tax revenue is dedicated to paying the principal and interest on bonds (and the other 90% is used to pay expenses).  This would assume that the budget is actually balanced and not that the country is going deeper into debt every month.  Anyways, we can project the future tax revenues (see my last projection), and I go out 30 years (2024-2053), and then figure out the present value of this number, assuming a 5% rate and a single payment per year.  The present value I come up with is $12.688 trillion.  Now compare this to the marketable debt outstanding, which is $26.58 trillion as of 10/31/23.  So this means that the actual value of a treasury bond is only 48 cents on the dollar.  The other 52 cents can be covered only by issuing new debt, and if the Treasury for some reason couldn't issue more debt, but could keep taxing people, then only 48% of it would be paid.

I don't know if this is an accurate way of valuing it, but it is an interesting idea to think about.  So the whole thing definitely is a Ponzi scheme assuming that you can issue new debt to infinity.  Question - what is the largest Ponzi scheme that has ever collapsed?  Bernie Madoff had a $20 billion scheme going and that appears to be the biggest.  Were there any bigger?

What is the value of a dollar?

 A dollar is a liability of the Federal Reserve. So I am really asking, what is the ratio of assets to liabilities on the Federal Reserve balance sheet.  The latest one we have is from June 30, 2023.  It shows assets of $8.375 trillion.  This includes $74.7 billion of deferred assets for the money it doesn't have to pay the US Treasury.  It also includes $7.916 trillion of SOMA holdings, which however have a fair market value of only $6.902 trillion.  So there is an unrealized loss of $1,013,555 (million).

So the assets really have a value of $7.360 trillion vs liabilities and equity of $8.375 trillion.  So the value of a dollar is backed only by 88 cents of assets.  That is why inflation is intrinsic.  Obviously the smart thing to do would be to take the dollar and invest it in something that is going to give you a dollar's worth of value.  Like a US Treasury bill. You can buy one in increments of $100 that matures in only 28-days and it will pay you interest and it is backed by the full faith and credit of the United States.  Everyone should (in theory) immediately do this and stop using dollars and instead start using promissory notes backed by Treasury bills.  If this happened then the Fed would (in theory) go bankrupt.  Because Treasury bills will provide you the full value of your money.  Or will they?  To be continued...  

Update: The deferred assets don't have any market value.  If you exclude them, this makes the value of a dollar only 87 cents.

====================

Update: The new quarterly report as of September 30, 2023 is available here. There are total assets of $8.195 trillion; however, this includes deferred assets of $106 billion.  The SOMA holdings are $7.695 tn, with a fair market value of $6.394 tn, for an unrealized loss of $1.302 tn.  So there are assets with a FMV of $6.787 trillion compared to liabilities and equity of $8.195 trillion.  So the value of a dollar is now only 83 cents.

So what does this mean?  Everyone is in denial but the Fed is insolvent.  If they were a commercial bank, they would be shut down.  So what is the solution?  Obviously to cut interest rates, which will increase the FMV of the holdings, and it will also help with the deferred assets.  And maybe get a bailout from the US Treasury, which could get a special equity stake, and get its investment back if the condition of the Fed increases.

However, if the Fed keeps issuing phony money, this is how hyperinflation starts. 

FY 2024 Projected Monthly Deficits

 Just for fun, I am doing a forecast of monthly deficits.  If the deficits are less than this I can be pleasantly surprised.  If they are more than this I can forecast more gloom and doom.  Let's see what happens.

	Estimate
	FY 2024
October	 100
November 250
December 100
January	 50
February 300
March	 400
April   -200
May	250
June	250
July	300
August	100
September 200
	======		
Totals	2100

I really hope the annual deficit is less than $2 trillion, but I think this is my prediction.