Treasury Forecasts Tax Reform Will Lead To Longest Period Without Recession In History

One week ago, in its latest assessment of the current state of tax reform in the aftermath of the Senate"s passage of the tax bill, Goldman analysts calculated that while growth impact from tax reform had increased fractionally to around 0.3% in 2018 and 2019 "reflecting the slightly larger amount of tax cuts in the Senate plan following revisions, and our expectations regarding the eventual compromise", it expected a very modest - if any - boost to US economic growth from tax reform.

Today, in a report prepared by the US Treasury - which as reminder is run by former Goldmanite Steven Mnuchin - and which was meant to bolster the case for the economic growth to be unleashed by the Trump tax cuts, and distract from the spike in deficit funding, the Treasury’s Office of Tax Policy (OTP) calculated that - somehow - the Senate"s version of tax cuts will result in 2.9% real GDP growth rate over 10 years.

This 2.9% GDP growth scenario compares to a baseline of previous Treasury projections of 2.2% GDP growth. Treasury "expects approximately half of this 0.7% increase in growth to come from changes to corporate taxation, while the other half is expected to come from changes to pass-through taxation and individual tax reform, as well as from a combination of regulatory reform, infrastructure development, and welfare reform as proposed in the Administration’s Fiscal Year 2018 budget."

This Treasury also claims that this 0.7% increase in growth results in an increase in tax revenues during the 10- year period of approximately $1.8 trillion.

And this is where the magic of fairy-tale forecasts comes in because adding this $1.8 trillion of incremental revenue to the static current law score of -$1.5 trillion results in total receipts over the 10-year window increasing by $300 billion.  In other words, the Trump tax cuts will not only not add to the deficit but will reduce debt by $300 billion, according to the Treasury.

Conveniently, the Treasury caveats that "these increased receipts are primarily collected in the last five years, as full expensing creates growth in early years but results in a deferral of collection of taxes."

It is unclear what is more ridiculous: that the propose gift to corporations will not only pay for itself but lead to a perpetual engine of trickle-down economic growth, one which has been refuted in every single instance in history, or that the Treasury expects the US economy to continue for another decade without a recession, which in 2027 result in an 18 year period of continuous growth since the last official recession ended in 2009, the longest period without a recession in history.

Of course, when the next recession hits no later than 2019 when the yield curve will be steeply negative and crushing the financial sector, government tax revenues will plunge leading to a blowout in government borrowing, forcing the Fed to launch QE4 as its monetization of the surging deficit will be critical in a world in which every other central bank will be dealing with its own issues at home.

As parting humor, the OTP notes the following:

We acknowledge that some economists predict different growth rates. OTP projects that at approximately 0.35% of incremental annual GDP growth, Treasury tax receipts would generate approximately $1 trillion of incremental revenue. Neither JCT nor Treasury has released a score showing increased tax receipts from the House plan, though we would not expect the results to be materially different.

We will be happy to revert to this post some time in 2027 when total US government debt is between $35 and $45 trillion, and when as the CBO correctly predicted, total US debt/GDP will be in its exponential phase.

The Treasury"s 1 page "analysis" is below (link):

Ray Dalio Warns Of "Significant" Bond Market Risk

Casting his vote in the ongoing debate of which is a bigger bubble, bonds or stocks, Bridgewater"s billionaire founder Ray Dalio, who has continued his whirlwind of media appearances in recent years, said that he sees a "significant amount of risk in the bond market" envisioning a growing risk to stability as the U.S. moves toward a bigger deficit and the Federal Reserve unwinds its balance sheet. He is, of course, referring to this projection by the CBO of the US debt over the next 30 years which, sadly, remains quite unsustainable especially in a rising rate environment and in which central banks no longer monetize deficits (which is precisely why the Fed will promptly resume QE after a brief cool off period).

Addressing this, Dalio said that "tightenings become progressively more concerning because as you move along they’re more and more difficult to get perfect." Speaking to Bloomberg radio, Dalio also warned that "as we’re progressing, we’re entering a period of greater risk in the nature of the market."

Meanwhile, confirming what anyone who has seen the fund"s 13F knows, Dalio said that Bridgewater has been long equities, but didn’t provide more details on how the world’s biggest hedge fund is trading the market. He also said he doesn’t think the Fed can continue the pace at which it has begun to unwind its $4.5 trillion balance sheet. Dalio also said he expects the U.S. budget deficit to increase to 1.5% of GDP, growing the supply of debt at the same time the central bank is offloading bonds.

“I think they’ll be cautious in this but when you’re caught in this part of the cycle it’s very delicate,” he said.

As we have discussed previously, with total federal debt over $20.4 trillion, rising interest rates will increasingly redirect a growing portion of US tax revenues to covering interest expense; the question is at what point will this become prohibitively high, and detract from other critical spending programs.

America Is Going Broke At Mach 30 "And No One Cares"

Authord by MN Gordon via EconomicPrism.com,

“No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.”

We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.

“The voters certainly don’t care about the federal debt,” he continued.  “They keep electing the same spendthrifts to office.

“And the politicians know the voters don’t care.  They also know that making more and more promises is the formula for getting reelected.

“Deep down, the aging masses know they need massive amounts of government debt to pay their social security, medicare, and disability checks.  On top of that, many of the so-called gainfully employed are really on corporate welfare; they hang their hats on government contracts to fund their paychecks.

“You know as well I do how this crazy debt based fiat money system works.  The debt must perpetually increase or the whole financial system breaks down.  The best we can hope for is that the ongoing currency debasement merely leads to a subtle erosion of living standards.  That’s the best-case scenario.

“But, again, no one except maybe a handful of your readers’ gives a rip about the federal debt.  Plus, if you’re gonna keep writing about it you need to use better terminology.

“The federal debt has grown at such a rapid rate that standard dollar units no longer capture what’s going on.  The debt numbers are so large it is difficult to distinguish between hundreds of billions and tens of trillions of dollars.

Going Broke at Mach 30

“For better perspective, you need to describe the debt growth in astronomical terms.  You see, astronomers use light years to adjust for large distances.  A light year, as its name suggests, is the distance light travels in one year.  One light year converts to light traveling about 5.87 trillion miles per year, excluding leap year of course.

“You noted that since President Obama took office in early 2009, at about the time the American Recovery and Reinvestment Act was passed, the U.S. federal debt has increased from $10.6 trillion to nearly $20 trillion.  Well, you were wrong.

“In the several days since you wrote that article, did you see the federal debt jumped to over $20.1 trillion?

“Apparently, after Congress suspended the debt limit last Friday, the Treasury went ahead and reported the $300 billion of off balance spending they’d run up over the last six months since hitting the debt ceiling in March.  This is what Treasury Secretary Mnuchin meant by resorting to ‘extraordinary measures’ to keep the government humming.  Sounds like Enron accounting to us.

“Anywho, over the last 104 months the federal debt has increased by $9.5 trillion – or at an annual rate of about $1.1 trillion.  This equals a rate of increase that’s nearly 20 percent the speed of light.  This also pencil’s out to $34,880 of new debt per second.  Are you starting to grasp the enormity?

“Still, if the speed of light example doesn’t do it for you, how about the speed of sound?  When Chuck Yeager first outran sound he reached what was called Mach 1.  That equals 767 miles per hour – or 1,125 feet per second.

“So, at $34,880 of new debt per second, the federal government is running up the debt at a speed that’s over Mach 30.  Yes, things have really gotten out of control!

To Hell In A Bucket

“You’d think that running up a tab at a rate like that would be a lot of fun.  But look around.  No one, including the upper crust, is having fun.

“Take that Facebook geek, for example.  Zuckerberg!  Have you seen the mug on that kid?  He wouldn’t know what fun is, if it jumped up and bit him on the behind.

“How much longer this government debt binge can go on for is anyone’s guess.  One thing is clear, however.  It has gone on much longer than any honest person could possibly fathom.

“Under George Dubya the federal debt doubled from $5 trillion to $10 trillion.  Then under Barry Big Ears the federal debt doubled again to $20 trillion.

“There are predictions floating around that The Donald will again double the federal debt, taking us to $40 trillion.  If he and Chuckles Schumer succeed in obliterating the debt ceiling, he just may pull it off.

“Can you imagine how miserable the economy will be when it’s larded up with $40 trillion in government debt?  You’d be lucky if GDP merely flat lined.  The whole dang shebang will be crushed under weight of this massive debt.  And don’t get me started on corporate and private debt – that’s a whole other story.

“You see where this is all going, don’t you?  To hell in a bucket!

“You’d think runaway government debt would be a big deal for people.  But it’s not.  As I keep telling you, no one cares about the federal debt.

“If you want people to read your articles, you need to write about Amazon or Apple stock – or cryptocurrencies.  Tell them prices will double and then double again.  That’s what people want to hear.  So why not give it to them?”

The Complete Debt Ceiling Decision Tree: "An Alarmingly High Probability Of A Very Bad Outcome"

For all the breathless newsflow over the past 7 days, the single most consequential event of last week was the sudden jump in debt ceiling/government shutdown odds following Donald Trump"s confrontational Phoenix speech, which laid out a problematic dilemma: Trump"s Mexican wall, or a government shutdown. While various financial pundits rushed to discount the odds of a worst case scenario, the market - in Treasury bills, if not so much equities - was spooked, sending the "pre-post default bill" spread to the widest on record...

... as October 5/12 Bill yields continued to blow out after various politicians were quoted with doomsday predictions, some suggesting the odds of a shutdown are as high as 75%.

The biggest concern as we head into the X-Date period of late September, early October is that the resolution of these problems, either the debt ceiling or the government shutdown, is not a simple linear decision tree, but is one where any momentary whim, or tweet, by Donald Trump can abort any compromise at a moment"s notice. Or, as Deutsche Bank puts it in a Friday report looking at the Debt Ceiling Dynamics, "the  current political backdrop is concerning" and as it adds, sarcastically, "a failure to raise the debt ceiling is a very bad outcome. And even a small probability of a very bad outcome is still a very bad outcome. Any kind of default would likely have far reaching negative ramifications for global financial markets and the US economy."

Still, as discussed previously, while the T-Bill market is clearly paying attention, equities and VIX have yet to respond: as DB"s Dominic Konstam writes, "despite this tail risk and the apparent turbulence surrounding DC, markets remain comparatively unperturbed. Recent spikes in the VIX have proved short-lived although a little more elevated than before." Still, there remains the risk of a sudden reaction as the deadline approaches if default risks become more tangible.

Just how likely is a "tangible risk" scenario? As DB calculates, there are several  possible paths forward.

The most straight forward and positive for risk would be if leadership from both declared support for a clean raise. Where the path gets more complicated is if either party decides it will only support an increase if it is tied to a more partisan agenda item. Unfortunately we don’t see more than a 50/50 chance of even an attempt of a clean bill to raise the ceiling or suspend it. This is because the House Freedom Caucus (HFC) is on record against a clean bill. As early as May, Mark Meadows HFC Chairman said “at this point we believe that there need to be some structural reforms in any debt ceiling vote.”

While we disagree with Deutsche, and in light of the troubling dynamics between Trump and Congress, a 50% chance of a clean debt raise sounds ridiculously high, there are several other probabiltiies.

The tree diagram below gives Deutsche Bank"s "very subjective view" on the probabilities associated with how a debt ceiling debate may evolve. Here is the full breakdown:

We start with the 50/50 chance of an attempt at a clean versus dirty raise. If it is clean it very much depends whether the Democrats will support a clean bill as we assume the Republicans will not have the votes without the HFC. We suspect there is a good chance that they balk, but even if we assume this is only a 25 percent chance, conditional on a clean bill attempt, this leaves a good chance of a bill raising the debt ceiling (adds 37 ½ percent probability to a debt ceiling crisis being avoided).

As a knock on implication, this could also lead to a new era of moderate Republican and Democrat reconciliation, although not necessarily. If the Democrats do insist on conditions then the clean bill attempt ends in a no deal probability.

This takes us to the dirty scenarios.

The smallest probability (20 percent) is again with the Democrats insisting on conditions that are accepted leading to a deal that adds another 10 percent probability of a deal.

The rest of the probability goes to either a deal with the HFC or a failure to come together. The latter obviously is no deal whereas the former should lead to a deal which may or may not include Trump’s wall.

In total, Konstam estimates that the probability of no deal - or a technical default of the United States - is a whopping 33%. As the biggest German bank redundantly notes, "We think this is an alarmingly high probability of a very bad outcome."

We conclude with some troubling parting words from Deutsche Bank:

Note that as in previous debt ceiling episodes there are possible fallbacks that would avoid default. There is the possibility of prioritization of payments, wherein Treasury would put principal and coupon payments on debt ahead of other payments, while still respecting the debt limit. Treasury Secretary Mnuchin told a House panel that he has “no intent on prioritizing,” but has not categorically ruled it out. Furthermore, while the Obama administration publicly maintained it was opposed to prioritizing the debt service, it came to light that Fed and Treasury officials had formalized a plan to do exactly that in 2011 if Congress and the White House hadn’t acted in time. There has also been in the past citation of the 14th Amendment, which, in Section 4, states “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” This leaves open the possibility that the President might unilaterally decide to raise the debt ceiling by bypassing Congress and effectively declaring the debt ceiling unconstitutional. This was debated in both 2011 and 2013, with President Obama expressing concern about the damage resulting from such unilateral action, regardless of constitutionality.

That said, we doubt Trump would share Obama"s concerns about the optics of any executive-level action, "regardless of constitutionality."

Morgan Stanley: Here Comes "The Three-Headed Policy Monster"

One month ago, Morgan Stanley"s chief cross-asset strategist looked at the current state of the market - "the S&P 500, Russell 2000 and NASDAQ have hit all-time highs. Volatility has plunged back down near all-time lows. Credit is tighter and yields have been stable" - and asked "what rattles this market. What breaks the egg?"

His answer was five-fold, including valuations, inflation, geopolitics and China, but the biggest concern was what is coming in just one month on the US legislative docket:

The debt ceiling worries us most, given that action may need to be taken within as little as seven weeks.

It was "seven weeks" four weeks ago, which means that the D(debt)-day for the US government - now expected ti hit in the first days of October - is ever closer, even as the domestic political situation in the U.S. gets progressively worse.

So where are we now?

Predictably, as Sheets writes in today"s latest weekly Sunday Start, "political risk is rising on our list of concerns, after a limited (negative) impact so far this year", and while the MS strategist is concerned about the UK, he is increasingly more worried about the US: "In the US, it’s the need to pass a budget and increase America’s borrowing authority so the world’s largest economy can pay its bills. The stakes are high; without the ability to issue new debt, our economists expect that the US Treasury’s dwindling cash reserves could be exhausted by mid-October" meanwhile "in the US, Congress will return Labor Day to face what my colleague Michael Zezas calls a “three-headed policy monster”: Raising the debt ceiling, passing a budget and embarking on tax reform. None are easy, but we see the debt ceiling as the most immediate test."

What happens then:

The most likely outcome is that, after some tension, the debt ceiling gets raised. But we don’t think it will be easy, or smooth, and it may require some form of market pressure to get different sides to fall in line. I’ve spoken to investors who are comforted by FOMC transcripts from 2011 that discussed prioritisation of debt payments in order to avoid default. I am not. First, I worry that this reduces the urgency of what remains a serious issue. Second, this prioritisation would require delaying payments to programmes like Social Security and Medicare, with real human and economic cost. And third, while the mechanics of this prioritisation may work, it is untested in a live environment.

In other words, the fact that the Fed has a "backup plan" for the worst case scenario, is precisely why the worst case scenario is now much more likely to happen, something that judging by the growing kink in the T-Bill curve, the market increasingly agrees with, and why the first week of October could be a major shock for risk assets.

Furthermore, assuming a best-case outcome, one where a clean bill passes with no problems, there is an additional wrinkle according to MS:

"in the good scenario where the debt ceiling is increased, the Treasury will need to issue a lot of paper to claw back the cash balance that’s been drained during this process. Our US economists think that this could involve US$300-375 billion of T-Bill issuance in 4Q, a level with very limited historical precedent."

While there are various trade ideas associated with that observation, Sheets ends off with a somber, philosophical adieu:

The idea that America’s creditworthiness is beyond reproach is, without exaggeration, the cornerstone of the global fixed income market. We hope that politicians appreciate the seriousness of this issue and put politics aside to resolve it. History is watching.

And on that note, here is Morgan Stanley"s full report:

One-Sided Political Risk

We remain constructive. But political risk is rising on our list of concerns, after a limited (negative) impact so far this year. In both the US and UK this risk looks one-sided and negatively skewed over the next month, with the best case being that it may not matter. We’d stress that this is before considering any effect on confidence or policy after a growing number of CEOs and business leaders moved this week to publicly rebuke and distance themselves from the US administration.

In a few weeks’ time, politicians will come back from their summer holidays to face serious challenges. In the UK, there will be increased scrutiny of the progress (or lack of) in Brexit negotiations. In the US, it’s the need to pass a budget and increase America’s borrowing authority so the world’s largest economy can pay its bills. The stakes are high; without the ability to issue new debt, our economists expect that the US Treasury’s dwindling cash reserves could be exhausted by mid-October.

Simple, one might say. For the UK, negotiations are still in their early stages. For the US, leaders from both parties have stated that they’re committed to raising the debt ceiling. Yet, both of these scenarios face the challenge of ‘campaigning versus governing’. We think this can matter for markets.

Let’s start with the UK. The idea of ‘Brexit’ was always loosely defined during the referendum campaign. But now that it’s official policy, a choice needs to be made between ‘soft’ versions that still encourage trade and ‘hard’ versions that curtail immigration sharply. Picking one will invariably disappoint some supporters, while those originally opposed to Brexit will likely remain so.

There is little margin for error: the government’s majority is slim, and our economists think the effective deadline for reaching a deal may be as early as October 2018 (considering the time needed for ratification by various EU member states). Having been bullish on GBP earlier this year, our FX strategists would now be sellers, expecting increased press attention on these challenges to impact sentiment. They like being short GBPSEK and GBPEUR.

In the US, Congress will return Labor Day to face what my colleague Michael Zezas calls a “three-headed policy monster”: Raising the debt ceiling, passing a budget and embarking on tax reform. None are easy, but we see the debt ceiling as the most immediate test.

You may not have realised it, but the US Treasury hit its borrowing limit in March, is unable to issue new net debt, and has been operating by running down its cash balance. Our economists estimate that those reserves will be exhausted by mid-October. Since one doesn’t want to cut this too close, this ‘debt ceiling’ needs to be raised by the end of September.

That won’t be easy. A subset of Republicans in the House want to make additional borrowing conditional on spending cuts (an issue they’ve campaigned on). That could be a non-starter for the Senate, where bipartisan support will be needed to reach the 60 votes that this increase needs. The fractious nature of the health care debate likely hasn’t helped the level of trust between the Houses of Congress and the parties within them. And the ability of the White House to whip key votes could be impaired by low approval ratings and the continued fallout from comments related to last weekend’s tragic events in Charlottesville, VA.

The most likely outcome is that, after some tension, the debt ceiling gets raised. But we don’t think it will be easy, or smooth, and it may require some form of market pressure to get different sides to fall in line. I’ve spoken to investors who are comforted by FOMC transcripts from 2011 that discussed prioritisation of debt payments in order to avoid default. I am not. First, I worry that this reduces the urgency of what remains a serious issue. Second, this prioritisation would require delaying payments to programmes like Social Security and Medicare, with real human and economic cost. And third, while the mechanics of this prioritisation may work, it is untested in a live environment.

There’s one more wrinkle: in the good scenario where the debt ceiling is increased, the Treasury will need to issue a lot of paper to claw back the cash balance that’s been drained during this process. Our US economists think that this could involve US$300-375 billion of T-Bill issuance in 4Q, a level with very limited historical precedent.

For investors, our interest rate strategists think that this should make it attractive to position for narrower 2-year swap spreads. If the debt ceiling is resolved, this flood of issuance could lead 2-year notes to underperform the swap. If it isn’t, the same result may be possible if investors temporarily avoid short-dated Treasury securities.

The idea that America’s creditworthiness is beyond reproach is, without exaggeration, the cornerstone of the global fixed income market. We hope that politicians appreciate the seriousness of this issue and put politics aside to resolve it. History is watching.

Debt Ceiling Deal Doubts Rise - USA Default Risk Hasn't Done This Since Lehman

The US Treasury Bill market remains notably inverted around the uncertain timing of the US debt limit debacle.

As Bloomberg reports, while Treasury bills maturing in October continue underperforming against November and December securities, the market has a murky view on the drop-dead date for the U.S. debt ceiling.

At the start of last week, concerns shifted to early October after the Treasury said in its 3Q refunding statement that it expects to be able to fund the govt through the end of September.

Focus then shifted back toward mid-October after the head of the House Freedom Caucus said he is ready to accept a debt ceiling increase without other conditions

However, one more worrisome market is starting to notably wake up to the reality of a deeply divided congress unable to agree on anything. The market for sovereign credit risk is flashing red with USA 5Y CDS now trading at its most extreme levels to German 5Y CDS since Lehman.

Note that the current credit-risk-premium for US Treasuries is higher than it was during 2013"s government shutdown and 2015"s down-to-the-wire debt ceiling debate.

But while Treasury and credit markets are flashing red anxiety levels, the VIX curve is doing the exact opposite and pricing in a relative drop in volatility... before a resurgence in the start of 2018...

So T-Bills worry about early October... VIX worries about year-end... and CDS confirm they have a problem. Who will be right?

The Striking Reason Why The US Just Spent A Record $429 Billion In One Month

On Thursday morning the CBO released a surprisingly upbeat assessment of Donald Trump"s proposed budget, calculating that it would cut the cumulative US deficit by 30% over the next decade, preventing the US debt from spiraling out of control (even further).

That however. may be an overly optimistic assessment, especially following the release of the latest monthly budget data, which showed that not only did the US deficit surge to $90 billion, far above the $38 billion consensus estimate, and a "NM" compared to the $6.3 billion budget surplus in June of last year, but the US also saw the biggest one month outlay on record, at $429 billion, 33% higher than the $323 billion in outlays one years ago.

What prompted this massive surge in outlays?

The biggest reason for the outlier print is that according to Stone McCarthy, outlays increased by roughly $60 billion in "other" items relative to baseline because the Treasury revised up its estimates of the subsidy cost of student loans, and to a lesser extent housing, it guarantees.

Here is the CBO explanation:

Outlays for the Department of Education rose by $31 billion (or 51 percent), because the department revised upward, by roughly $39 billion, the estimated net subsidy costs of loans and loan guarantees issued in prior years—a change much larger than last year’s $7 billion upward revision. If the effects of those revisions were excluded, outlays for the department for the first nine months of fiscal year 2017 would have fallen by $2 billion (or 3 percent).

Outlays for the Department of Housing and Urban Development rose by $29 billion, primarily because the department made upward revisions in June 2017, but downward revisions in April 2016, to the estimated net subsidy costs of loans and loan guarantees issued in prior years.

The cost of those loans is treated in the budget on a present value basis, not a cash basis and the Treasury periodically revises these costs. (It should be noted that the associated increase in outlays doesn"t impact Treasury borrowing or debt under the debt limit.) If not for these special factors, Treasury would have reported another small surplus for June... however it did not.

On the revenue side, things were just as bad with the US Treasury collecting only $338.7BN, just 9% higher than the $330BN in June of 2016.

What makes the surge in the deficit especially surprising is that June is often a surplus month, as the Treasury receives large corporate and non-withheld individual tax payments in that month.

One theory explaining the shortfall in revenues reflects taxpayers delaying the recognition of income in 2016, anticipating tax cuts this year. That revenue should eventually be recovered. About a third of the revision was on the outlay size, with a large chunk due to changes in the estimated subsidy costs described above. Based on the CBO revisions, it appears that the deficit for the fiscal year, which has three months left, will be in the $650 billion to $700 billion range, if not even higher, mostly due to the surge in "subsidy costs of housing and student loans" guaranteed by the Treasury.

Combining these two means that YTD, the deficit jumped to $523.1BN vs $399.2BN last year.
While many analysts had a deficit base case for fiscal 2017 at roughly
$575BN (the year ends on Sept 30), the CBO recently revised its
projection for the fiscal 2017 up by $134 billion to $693 billion. Most of the CBO revision reflects weaker than expected revenues, which means it will be even more surprised when it finds out what is going on with outlays.

To summarize: what the unexpected surge in government spending means is that quietly and mostly behind the scenes, the student debt bubble has begun to burst, and the Treasury is "provisioning" for it in real time, with all US taxpayers once again on the hook.

Finally, since the $1.4 trillion and rising student debt bubble is expected to end up with discharges of 35% if not higher, it means that over the next several years, the budget deficit will be incrementally boosted by approximately $500 billion as America"s taxpayers are once again taken to the cleaners, this time to bail out millions of liberal arts majors who for one reason or another just can"t pay back their student loans.

h/t @SMRA

Realism Is The New Pessimism (Or Why 4% GDP Targets Are Ludicrous)

Authored by Chris Hamilton via Econimica blog,

The American core population (aged 15-64) is the greatest economic consumptive force on earth.  They make up 2/3rds of the total US population and 95% of US employment.  When considering growth, particularly the all important annual growth in Gross Domestic Product, the growth of this population should be the first consideration (although it is strangely nowhere in typical economists or Federal Reserve accounting).  From a growth perspective, it doesn"t matter if this population is 3.25 million or 325 million...all that matters is how many more there are than the year before.  Some will point to wage growth but this is essentially equally offset by rising prices.  It is the growth in this population that drives the need for new housing, new infrastructure, and generally adds millions of new consumers every year (aka, demand growth)...until now.

The core US population growth has been slowing since "00 and as of this year (drum roll please) that growth is ending.  To be clear, this wasn"t "supposed" to happen.  Not according to the Census or all those planning on perpetual growth.  But as the chart below highlights (yoy change on a monthly basis), for the first time since WWII (and perhaps in US history) the core US population has ceased growing...and is likely to begin declining in the coming months and years.  FYI - The spikes of "90, "00, "10, and more since are due to Census adjustments, not sudden population changes.  Further downgrades should be expected as Census estimates for growth remain overly optimistic.

A combination of factors are driving this cessation of core growth including decades of negative birth rates (even among the recent immigrants), the graduation of the boomers to the 65+ population, and little to no net illegal immigration since "08 (now combined with political and enforcement factors further turning net immigration to significant levels of net emigration).  This all adds up to a fast decelerating basis for US consumption growth...and out the window with it, the notion that superior immigration driven US demographics will save America.

Yes, the total US population is still expected to grow this year by 2.2 million, at a total level more in-line with that seen in the 1980"s (when the US population was 2/3rds it"s current size).  However, even that 2.2 million number is likely to be significantly downgraded due to the factors above...perhaps downgraded by as much as 50%...such is the impact of net negative illegal immigration?!?

Some real world correlations may be found in plotting housing starts vs. the annual change in core population...below.  The current divergence of rising housing starts for a core population no longer growing should be setting off alarm bells.

And vehicle sales vs. change in core population...below.  Selling massive quantities of debt fueled vehicles for a core population no longer growing...what could go wrong?

If this trend persists, all net US population growth is now solely among the 65+yr/old population living a decade+ longer than the previous generation.  From a GDP growth perspective, the impact of a declining 0-64yr/old population (the big population that drives economic activity) only offset by a much smaller but growing 65+yr/old population (that is leaving the work force, credit averse, and moving to fixed incomes) should be pretty straight forward.  Simply put, the basis for GDP growth (among other things) is in deep shit!

The chart below detailing US population growth among the demographic segments versus annual GDP.  The last column on the right is a death knell for growth in a world already awash in overcapacity and debt.

And as for GDP, it is now simply a reflection of new federal debt.  The chart below shows annual GDP growth minus the annual growth in federal debt...and since "08, there is no growth but the growth in un-repayable federal spending...and it"s going to get much worse.  Full details HERE.

And for those who struggle to understand the impact of the core population, the chart below highlights the substitution of federal debt since the core growth began decelerating.  And what level of federal debt creation (and CB asset purchasing) will need happen as the core ceases growing or outright declining?  Well, I guess we"re all about to find out how you make fewer people consume more stuff (or at least how you make the numbers appear so) and simultaneously avoid asset bubbles from imploding.

Of course, none of this is reflected in the "markets" as the chart below highlights.  The Wilshire 5000 (blue line representing all publicly traded US equities) has blasted $10 trillion higher than the acknowledged "bubbles" of "01 and "08.  Talk of further interest rate hikes, the Fed reducing its balance sheet, and true economic growth is simply a most vexing discussion in the face of a likely declining consumer base!?!  I attempt to pull together the growth of flood of M3 "money" HERE and decelerating population vs. consumption HERE.  Lastly, I try to outline who is buying the Treasury bonds HERE and likewise how the stock market is levitating HERE.

And as always, there will be those who suggest it will be global growth that is lifting all boats...again, bullshit...as outlined and detailed HERE, HERE, HERE, and especially HERE and HERE. The current system of infinite growth on a finite planet is up against some very hard stops...and how much longer the papering over of widening chasms can be maintained is unknowable (as is which assets may survive the great fall and the subsequent reset).  The only thing I know for sure is the fall is imminent, the heights from which we will begin our descent are dizzying, but it"s unsure what will arrest our fall into depopulation, deflation, and depression.  Realism is the new pessimism.