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US Treasury Defecates – Held In The Bowels of The Fed

The Federal budget deficit is blowing out. Federal tax revenues are growing slowly, and Federal outlays are exploding. As spending soars, and revenues fail to keep pace, the Federal budget deficit grows.

The Federal budget deficit for October was $188 billion, $35 billion higher than October 2017. That’s from the US Treasury’s October 31 Daily Treasury Statement. It’s not an estimate. It’s actual revenues minus actual outlays. No manipulation. No statistical chicanery. Just pure, unadulterated fact.

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OK, some months are worse than others, so let’s not annualize.  But really, this is horrendous. September, a tax collection month for individual and corporate estimated taxes was better, with a deficite of only $24 billion. But combine the two months and that averages $106 billion a month.

And November is always a terrible month. As was August, with a deficit of $160 billion. Really, let’s not project. It’s sickening.

Meanwhile, to pay for that spending that isn’t covered by revenue, the US Treasury must issue ever more debt.

In September, the banking system ran out of money to absorb all that Treasury paper at an interest rate that was acceptable to the Fed. Overnight money rates soared as the market became unable to finance the purchase of the new paper the Federal Government was issuing.

So the Fed, unwilling to see the illusion that it controls interest rates shattered, acted to preserve that illusion.  It started emergency TOMO (Temporary Open Market Operations). Then it added a layer of POMO (Permanent Open Market Operations) to inject hundreds of billions of new money into the system.

OK, so if they have the power to preserve the illusion, then I guess the Fed does “control” interest rates. But at what cost?

The Fed is Monetizing the Federal Budget Deficit

The cost is this.

The Fed is now monetizing the Federal debt.

Every penny of it.

And then some.

On Friday, November 1, 2019, the Fed bought $7.5 billion of Treasury bills. On Monday, it bought another $1 billion of Treasury coupons in POMO.

Meanwhile, in TOMO it has added $26.7 billion in overnight and 14 day repos outstanding to its total over the past week. Those are ostensibly short term loans that will get paid back. But if the amount outstanding just keeps growing, the money takes on an air of permanence. And the amount outstanding keeps expanding because the dealers absolutely require it to keep from having to liquidate their bloated bond inventories, much of which are underwater.

So the Fed either buys it from them, or lends them enough money so that they don’t have to liquidate.

I call all this money imagineering by the Fed, QE New. I discussed this in today’s Liquidity Trader.

Total QE New has grown to $316 billion as of November 4, just 7 weeks since the program began. That’s an average of $45 billion per week, $196 billion per month, $2.35 trillion per year.  Pretty soon you’re talking real money, as the old joke goes. Only this isn’t funny.

QE New Monetizes the Federal Budget Deficit

Meanwhile, the Federal defecate [sic] has grown by “just” $296 billion since QE New began. So, with the $316 billion it has imagineered, the Fed has not only monetized 100% of the debt, it has kicked in an extra $20 billion for the Primary Dealers to play with in the markets.

Actually, they can play with most of the $316 billion in Fed cash, since other buyers will, in fact, absorb much of the new issuance directly.

As a result of that Fed play money, the dealers have been able to pump up stock prices by 2.8% since the inception of QE New.  They’ve had less success with the bond market. For example, the 10-year Treasury yield is down just 3 basis points since the Fed started imagineering all that money into the accounts of the Primary Dealers. Worse, the 10-year yield has risen by 26 basis points since October 8.

The dealers and other players remain overleveraged. So the best they can do with all that cash is to keep their bond portfolios from imploding while goosing stock prices a tiny bit.

This doesn’t exactly inspire confidence. But as long as the Fed signals that it will monetize everything in sight for as long as is needed, it’s hard to imagine these financial asset bubbles deflating.

That said, my job isn’t to imagine. It’s to follow the data wherever it leads. That includes the technical analysis, which so far, remains bullish on stocks. You can follow that story in the Technical Trader reports.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

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