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US Debt Ceiling, The Wall, Runaway Spending And The Lack Of Evidence Of Concern … So Far (Low US CDS)

This is a syndicated repost courtesy of Snake Hole Lounge. To view original, click here. Reposted with permission.

The US Statutory Debt Limit, a failed tool to halt the endless growth of Federal debt issuance, is once again in play at nearly $20 trillion. It was only at $6 trillion in 2002.

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stdebt

The problem, of course, is runaway Fed spending which is currently at around twice that of Federal current tax receipts, requiring that the deficit be funded by issuing Federal debt (or raising taxes and/or cutting Federal spending).

feddebtugh

The staggering increase in Federal debt starting in 2007 also resulted in a large spike in public debt to GDP.

debttogdp2017

The US has joined the European PIGs (Portugal, Italy, Greece, as well as Cyprus and Belgium) in having debt as a percentage of GDP being over 100%. The fourth debt piggie is Spain at 99.40% debt to GDP.

crisis

The core problem with Federal spending, now and in the future, is mandatory (entitlement) spending.

discmansp

Of the entitlement spending, Medicare is growing at an unsustainable rate (although Medicaid growth is no slouch either).

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So we are on an ussustainable track in terms of spending. How does “the wall” with Mexico fit it? It could be funded with more taxation, or spending cuts on other programs. Democrats LOVE raising taxes, but not to build a wall. Republicans are split on building a wall (open border freemarketeers versus those with national security concerns).

My colleagues at my former employer Deutsche Bank have attempted to lay out possible funding scenarios. Although I think the odds of deep spending cuts is about as likely as North Korea embracing personal freedom and capitalism.

debt ceiling tree

With explosive Federal spending and projections of public debt exceeding first $20 and then $30 trillion, I have little doubt that Congress and President Trump will agree on a debt limit increase even if there is a momentary government shutdown.

But right now, credit default swaps are signaling no shutdown, particularly in comparison to previous shutdown fears surrounding debt ceiling increases (orange boxes).

cdsstat

So, there is nothing YET showing up in the CDS data. We are seeing an increase in Treasury bills rates even when the probability of a Fed increase in their rates is very low for the next year.

billraterising

The probability of a US default is around 0.04%.

USPRPN

But there is also a realization that while there was intial enthusiam that Trump would lower taxes and deregulate the economy,  there is has a steady decline in enthusiasm over his promises since Congress is obstructing most of Trump’s economic agenda.

102enthuscurve

We can hope that Congress and President Trump follow the advice of the band Canned Heat and work together. 

But we do know that Congress loves to spend money, so they have a natural mutual allegiance to raising the debt ceiling.

Perhaps Andy Dwyer and Mouserat from Parks and Recreation can rewrite their song “The Pit” as “The Wall.”

mouseratthepit

 

Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. I may receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.

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