Wednesday, April 29, 2009

More on the US Treasury Finances

The Auction schedule for the US Treasury debt securities shows the planned auction dates till November 05 2009.
As of April 28, 2009 the International Reserve Position of the United States shows total foreign exchnage reserves of $ 75, 877 million - or around $ 76b, according to this press release from the Department of the Treasury.

According to a Treasury statement to the Associated Press, The US Treasury plans to borrow $361 billion in the current April to June Quarter. Excerpt:

The $361 billion estimate for borrowing this quarter compared with borrowing needs of just $13 billion in the year-ago period. Normally the government's borrowing needs shrink sharply in the April-June quarter because of all the tax revenue being collected.

But, please remember:

Treasury also estimated it will need to borrow $515 billion in the July-September quarter, down slightly from the $530 billion borrowed during the year-ago period. The all-time high of $569 billion was set in the October-December period.

Here's a link to the latest Treasury Note, Bond and TIPS auction results.

Saturday, April 25, 2009

How much should a Sovereign Borrow? - continued reasoning on the Treasury finances

Chapter 18 of 'Principles of Corporate Finance' authored by Brealey & Myers deals with the interesting topic 'How much should a firm borrow?'. I don't know of any slim volumes in the public domain that present a similar reasoning for Sovereign borrowers. However, King Financing is one of the biggest games in the world. I bet the King Financiers have batteries of private PhDs churning out reams of ring-binded reports to work out the considerations for them. So I'm left to deal with this important topic with my own wits.
First of all you need to reason with the different categories of expenses or 'outlays' that a Government has. A Government needs money to provide certain public goods, for which it will collect taxes. For instance, people pay taxes and the collected amounts may be utilized to pay salaries for cops who maintain the law and order. Then you have outlays that are intended to create a long term benefit. For instance, the US Government can provide an economic stimulus for Chinese laptop manufacturers by giving free computers to school kids. The Government hopes that the kid will utilize the computer to pick up various skills, in turn earning a better income when it grows. This will result in a higher income tax collection for the Government in future.
It's important to split the Government outlays into items that are like operating expenses they have to provide required public services, and items that are intended to provide a long term return in terms of future GDP expansion and increased future tax collections.
The next part of the reasoning is on the interest the Government pays on its outstanding debt. You have to remember that a Government Bond holder isn't a beneficiary in future higher tax realizations of the Treasury. The debt holder simply receives interest and hopefully, the principal back from the Government.
The Government financier's interest is to make sure that the interest being paid is out of the money the Government is levying on citizens on an ongoing basis, and not out of the money that is realized from the Government borrowings themselves. A Government debt holder will expect interest to be paid out of the annual earnings of the Treasury. The one year term is derived on the understanding that most levies are collected on an annual basis.
From this reasoning, it is clear that on a stand-alone basis a Sovereign can borrow to the extent that the excess of its annual levies over outlays for operating expenses to provide routine public services is sufficiently large to meet interest payment obligations on its outstanding debt.
In case of the US Treasury, foreign central banks have a compulsion to lend money to them due to the military-diplomatic hegemonic compulsions. This factor enables the US Treasury to create a 'safety bubble' if it so chooses. Also, the triangular debt trading in the Treasury securities amongst the Treasury, Fed and primary dealers constitutes a method of extracting contributions to Treasury debt through the secret concession embedded in the Treasury Supplementary Financing Account.
In this framework, you need to analyze whether the US Treasury interest outgo is coming out of an excess of Treasury Revenues over routine operating expenses or not. If not, the Treasury is completely dependent on foreign central banks for financing. The day China decides to stop buying Treasuries, all other foreign central banks will have no choice but to follow suit, and in this scenario the US Treasury will go bankrupt.
To be continued ...

Thursday, April 23, 2009

Updated: Is it time to prepare Insolvency Accounts for the US Treasury?

Operating Cash Balance: The operating cash level of the US Treasury is mentioned in the daily Treasury statement to be $295,462 million as of 22-APR-2009. Out of this $199, 929 million is in the Treasury Supplementary Financing account.
Revenues and Outlays: The monthly Treasury statement contains the data on past revenues and outlays of the US Treasury. Last month, i.e. in March 2009, the US Treasury spent $192,273 million more than they earned. Since October 2009, their total excess of spending over revenue is $ 956,799 million - or nearly a trillion dollars.
Expected Deficits:
Here's a preliminary analysis of President Obama's budget proposals under the aegis of the Director of the Congressional Budget Office. Excerpt:
"CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019.The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions). ”
The US Public Debt:
As of this writing, the US public debt totals $11.184 trillion.
Sources of financing:
One of the main sources of financing for the US Treasury is Chinese purchases of Treasury and other dollar denominated securities. Dr. Brad Setser at the Council on Foreign Relations is one of the world's foremost experts in the area of balance of payments and global capital flows; and he has taken a specialized interest in studying the size of holdings, currency composition and portfolio allocation of the world's central banks and sovereign wealth funds.
In this paper written along with Arpana Pandey for the CFR Center for Geoeconomic Studies, Dr. Setser has described estimation methodology and data to understand the activities of the People's Bank of China and its associated Sovereign entities.
Yesterday, China revealed its holdings of gold, and here's an article in the Financial Times on that topic.
Note on the United States Public Debt:
Here's a link to the Bureau of the Public Debt web site and on the site if you go to the link "see the U.S. Public Debt to the penny" - the total as of this writing is $11, 184, 922,662,862.85. Of this total, "Intragovernmental holdings" form $4.299 Trillion, and "Debt Held by the Public" forms $6.885 Trillion. In most media and official reports, only the $6.885 trillion is taken into account as US public debt. Typically, that calculation yields around 40+ % of GDP as the US Public Debt.
Understanding the correct nature of "intragovernmental holdings" provides you the accurate, and more practical picture. The contribution made by US citizens towards social security, and other sources of revenue of US government departments, was added to the Congressional Budget as an appropriation. The US Treasury then spent those amounts and issued debt securities to those other US Government entities. Mostly, the $ 4.3 trillion is US Treasury debt held by the Social Security Fund.
The common reasoning provided for not taking the Social Security appropriations into the Us public debt calculation is that that debt is simply not held by the public, and not settled in the market. The US Treasury has payables and liabilities towards Medicare and Social Security that are as yet unfunded.
My view is that what really matters is the cash flow situation. The $4.3 trillion owed to Social Security Fund can be seen as "flexible debt". As long as the Treasury is able to meet the outflows towards its unfunded liabilities, the intragovernmental debt holdings aren't that much of an issue.
Note: I've updated my comment on the US Public Debt after some further serious thinking.
To be continued ...