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Debt Limit Circus Continues - Update Sunday Night 7/31
08-01-2011, 01:19 AM
Post: #1
Debt Limit Circus Continues - Update Sunday Night 7/31
Debt Limit Circus Continues - Update Sunday Night 7/31

Summary

1) Investor demand for U.S. debt far exceeds supply even at near record low rates. Investors continue to pour into Treasuries – the safest debt in the world. Where is the debt crisis?

2) Rep Boehner’s last holdup was his refusal to have $350 bil in defense cuts. Earlier in 2011 he got a $450 million earmark he insisted on for the defense contractors in his home district.

Democrats were stuck on not wanting entitlement cuts.

It is unlikely to pass Congress. Republican House has T party not wanting any deal that increases the debt ceiling. Democrats don’t want entitlement cuts forced in the 2nd phase and want revenue to be part of a “balanced deal” not all cuts that will result in job losses and be on the backs of middle class. Republicans got most of what they wanted with almost no compromises. Democrats may not agree to pass it even if Obama has reluctantly agreed feeling forced to with the debt ceiling taken hostage.

3) Treasury appears to lacks funds for Aug 4th Social Security not to mention military pay etc.

Real issue is jobs. If only this much passion was on job creation instead of so much wasted time on a non-issue vs. jobs. Spending cuts directly cut jobs and slow the recovery when the real issue is jobs and the economy not fantasy of a debt crisis when bond market obviously shows no current concern.

Our diminishing competitiveness and ability to invest in the future - those are real crises, and ones that the debt ceiling debate will do nothing to solve.

Details

1- Treasury auctions continue to have far more bids than U.S. debt offered. Interest rates have had very minimal increases and are near historic lows – no debt crisis obviously in the U.S. debt market. Latest auction of 1 year Treasuries issued 7/28/2011 – $20 billion offered – Bids made for $92.2 billion (4.63 times the demand for debt vs. available). Median interest rate 0.185%. Almost free money to the Treasury. Where is the debt crisis ????

On Friday 7/29/2011 in the bond market (not new debt auction) the U.S. 10-year note soared in value and yield declined to 2.804%, its lowest rate since November. Many believe if there are no new Treasury offerings for a while, existing bonds will trade higher in value (lower interest rate) due to the huge demand for the safest debt in the world regardless of rating companies' opinions – U.S. debt.

Ability to pay debts – debt service - The Congressional Budget Office estimates that net interest on the debt (which is what the government pays to service it) would be $225 billion for fiscal year 2011. The latest figures put that a bit higher, so let's call it $250 billion. That's about 1.6% of American output, which is lower than at any point since the 1970s - except for 2003 through 2005, when it was closer to 1.4%.

Under Ronald Reagan, the first George Bush, and Bill Clinton, payments on federal debt often got above 3% of GDP. Under Bush the second, payments were about where they are now. Yet suddenly, we are in a near collective hysteria declaring we have a "debt crisis" instead of a jobs crisis.

The deficit has to decline eventually by a stronger economy resulting in higher tax revenues. We also need further spending cuts when the economy can absorb it. We also need more revenue from the most wealthy corporations and individuals who enjoy some of the lowest tax burdens in the world based on actual taxes paid.

2- In the final hours Sunday night Boehner was holding out to reduce roughly $350 billion in cuts to defense spending that would be part of an initial $900 billion in deficit cuts tied to a debt ceiling increase of a similar amount. Boehner also was refusing to agree to an even split between cuts to defense and other spending that would be triggered if Congress failed to enact a deficit reduction plan produced by a special congressional committee or doesn't pass a balanced budget amendment. Appears he reached agreement late Sunday night

Democrats want Social Security, Medicare beneficiaries and Medicaid exempted from the cuts imposed if Congress cannot act on a plan from the special committee.

Very unlikely will pass both houses and when citizens actually see what cuts mean may create more turmoil. Many in the T party want no debt ceiling increase period.

3- $23 billion in social security needs to go out on August 3rd as well as $50 billion in Medicare and Medicaid payments, $31.7 billion for high-priority defense-vendor obligations, and $12.8 billion in unemployment insurance benefits. Later in the month more social security payments due as dates are staggered.

CBS estimates Treasury cash will be only about $18 billion. Not to mention $87 billion in Treasury debt that is due August 4th and Treasury interest due of $29 billion on August 15th. Revenues come in daily but not enough to meet payments due.

Highest priority has to be to Treasury debt to avoid a default. Unless Treasury has a hidden gimmick there simply is no money to fully pay social security, military pay etc. without risking not having enough to pay Treasury debt, if the debt limit cannot be increased.

After Treasury’s meeting with major banks, J.P. Morgan Chase and Bank of America are prepared to waive overdraft penalties or forgive loan payments for millions of customers who rely on Social Security, veterans disbursements and other federal benefits. Millions of folks depend on their 3rd of the month direct deposits for the checks they write for first of month payments.

Treasury has been clearing headroom for additional borrowing since hitting the $14.29 borrowing limit on May 16, primarily by removing investments from government employee pension accounts.

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