In 2009, as we stared into the debt depression abyss, the US government deficit breached 10% of GDP. This was well above the 6% threshold that many believed triggers capital flight from a country. In the 3 years that followed, the concept of a Debt Crisis was floated over the public like the Blimp over a sporting event. We argued that in the case of the US, "concern for public debt was inversely proportional to economic knowledge." On CNBC, I advocated the "Bob Rubin Approach" - merely turn the trend and let the economy do the rest.

The CBO now predicts Def/GDP of 4% in 2013 and sub-3 in 2014. The sequester is a factor but the power of even mild positive growth and time is undeniable. In dollar terms the budget has improved by about 480B from the 09 trough or 40B/month. That number is roughly the running standard size of most of Uncle Sam's auctions. Obviously, its also the amount the Fed takes up (then there's the re-investment). The big unknown is not "tapering", it's the system change from wholesale funding to collateral lending that occurred since the '08 seizure.

As Josh Brown pointed out at The Reformed Broker this morning, the private sector has been working to offset the public debt improvement- with a jump in Corps, junk, PIK and Cov-lite issues (YAY).  However, T-Bill paydowns have been small thus far and the housing GSE's are going bye-bye, so the system is auto-tightening. A rise in counter-party non-securitized non-collateralized lending is needed to offset the impending drop in government debt. In the words of George Bush, "Naw gonna doo it, wouldn't be prudent."

There's a problem coming. Contrary to the warnings of "Too much debt", the problem is going to be not enough.


5 thoughts on “Auto-tightening

  1. AlphaBet(a) Soup

    Will FED tapering and the eventual “need” to liquidate portions of their portfolio not release enough debt back into the system? Do you think the government should be borrowing more at the current low-rate environment for infrastructure improvement?

    Would like to see a follow up piece on this as you have just created a direction of thinking I had not previously taken. Great post!

    1. Kevin Post author

      the collateral gets tied up pretty quickly. We doubt the fed ever sells much cuz of context. Key is the Fin System is not funded like pre-crisis system…very pro-cyclical now

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  3. Kevin Post author

    as long as they see growth potential, QE is a way to “crowd in” activity that might not occur when prospects are uncertain or slow

  4. Lawrence Martin

    Would some rise in real interest rates induce private sector individuals to put their money at risk in various endeavors now ‘crowded out’ by overly generous govt functionaries ?


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