More Treasury Paper Dumping by the Truckload. It Could Mean Only One Thing…

As if the widening Federal Budget deficits forecast by the Congressional Budget Office (CBO) weren’t bad enough, the Monthly Treasury Statement for August released last week, revealed that things are even worse than even the CBO thought.

But are we surprised?

Heck no.

We have been tracking this disaster month after month, as we watch the US Treasury dump an ever growing supply of new paper on the market month after month.

Now even the mainstream media is picking up the scent.

The normally restrained Bloomberg shouted it from the mountaintops in 45 point type:

U.S. Budget Deficit Swells to $898 Billion, Topping Forecast

Bloomberg reported that the deficit in the first 11 months of the fiscal year rose by a third from fiscal 2017.

They noted that “Federal spending rose by 7% to $3.88 trillion,” adding, in the fashion of our Pinocchio-in-Chief, “Outpacing revenue gains of 1% to $2.99 trillion.”

Not only is revenue being significantly outpaced by spending, the revenue gain that Bloomberg reported happened entirely BEFORE the tax cut. Since the tax cut, revenue has plunged.

Just so there’s no misunderstanding, let me repeat. Revenue has collapsed since the tax cuts took effect. And spending has soared since the Budget Busting Agreement took effect.

Since February, the revenue losses have been piling up, month after month.

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The Federal Fiscal Year starts in October. The tax cut was passed in December and took effect mostly in February when the new withholding tax tables were published. The effect of the corporate tax cuts didn’t start to be felt until March, when the year-end corporate tax payments for 2017 were due.

In the first four months of the fiscal year through January, before the tax cuts, total Federal revenue grew by $45.7 billion. But from February through August, in the period after the cuts became effective, total Federal Revenues FELL by $19 billion. And that included a massive individual income tax haul from non-withheld filers in April that was at the 2017 rate.

Looking at only withheld taxes we can see just how big the loss of revenue has been. In the first four months of the fiscal year, before the tax cuts started, the Federal Government collected $49 billion more in withheld taxes in fiscal 2018 than in fiscal $2018. In the 7 months since then, withholding tax collections were  $22 billion less than in the same period of 2017.

To truly appreciate the gravity of this situation, let’s look at all the months since the tax cut took effect, except for April, when individual income taxes came it at the 2017 rates.

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For February, March, May, June, July, and August, Federal revenues fell by $81.5 billion, or an average of $13.6 billion per month.

As Bloomberg put it so elegantly, “The White House says the tax cuts will pay for themselves by creating more revenue through faster economic growth.”

But it ain’t happening, folks! Tax cuts are not paying for themselves. Yes, there’s more economic growth, but there’s less revenue.  Of course massive deficits are stimulative. Even we non economists know that. But where’s the revenue growth? It’s nowhere to be found.

As this graphic shows, there’s no sign whatsoever that this debt financed spending is driving increased revenue.

Gross Domestic Product (GDP) growth has fluctuated around a rate of 2.5% since 2010. The red line showing the GDP indexed to 2010 at 100, shows that those fluctuations have hardly been material in the big picture. If you believe the government statistics, the growth trend has been steady as she goes.

The blue line shows the 3 month moving average of withholding taxes also indexed to the 2010 average. They’re highly seasonal, but they were moving along the same trendline as GDP until this year. Then the tax cuts came and BOOM! Withholding taxes fell out of the trend.

As you can see on the lower graph, GDP had a spurt in the second quarter, if you believe the Bureau of Economic Analysis (BEA). Again, we expected this. There’s no mystery that deficits stimulate the economy. When the government borrows money to buy more stuff, that causes an increase in business sales.

Meanwhile, the growth rate of withholding taxes has turned to the shrinkage rate, falling to around minus 3% in July, before rebounding to near minus 2% in August. That’s hardly a sign of the tax cut “generating more revenue.” Withholding taxes always fluctuate. A couple of months of declines are always followed by a few months of upticks. Let’s see where this one fades out before we start talking about a gain in revenues.

Furthermore, the uptick in GDP growth isn’t even as high as a couple of quarters in 2014. So there’s not even that much evidence that the tax cut is stimulating much. For sure the economy would have been slower without it, but the limited economic gains produced by this spending have a cost.

I hate to beat the horse that’s already dead, but that cost is massive federal borrowing. The deficits must be paid for by the issuance of ever increasing amounts of Treasury debt. When that debt comes to market dealers and investors must buy it. The Fed stopped printing the money to buy all that paper at the end of 2014. And since October of 2017, the Fed has actually been extinguishing money. There’s less and less money in the banks, making it that much tougher for dealers and investors to absorb all the new paper.

Because of that, Treasury bill and note yields have been blowing the roof off. Short term bill rates and 2 year note yields are skyrocketing. The yield on the 10 year note is knocking at the door of 3% again.

The Stock Market Party Continues. But Don’t Be the Last One to Leave

Despite the mounting concerning evidence, the stock market parties on.

But it can’t last. As T-bill rates soar, and note and bond yields inevitably resume their rises, more and more investors will begin to make the safe choice. They’ll sell a few stocks and put their money into Treasuries.

Meanwhile strengthening economic data will strengthen the Fed’s resolve to keep tightening the monetary noose. The time is coming soon where there will no longer be enough liquidity to support higher stock prices in the face of the continuing onslaught of treasury supply.

If you have followed my advice in the past, you are largely out of stocks, and you can sleep at night, not having to worry about what might lie ahead. Now, we just need to be on the lookout for any sign of a technical break of stock market support. That will be the sign to begin adding a few more puts on the SPY to our tactical trading so that we can profit from the coming decline.

I will keep you updated right here at Sure Money for on any sign that that break has begun.


Lee Adler

7 Responses to “More Treasury Paper Dumping by the Truckload. It Could Mean Only One Thing…”

  1. Lee,

    I find your commentary re. declining federal tax receipts to be a lot like “chicken little” or shouting fire in a crowded theatre. You cite a decline of $81.5 billion as some huge gigantic number. In fiscal 2017 the federal government took in $3.32 trillion. A decline of $81.5 billion by my calculation is 2.45% of the prior year’s receipts.

    From fiscal 2015 to 2016 federal tax receipts increased by only $20 billion. From 2016 to 2017 it was a slightly more robust increase of $50 billion. That’s snail’s pace growth.

    Rome wasn’t built in a day. I do not think a decline in tax receipts in the first six months after enactment should be unexpected. It takes time to get some the size and complexity of the US economy moving more quickly in the right direction. If, in fiscal 2019 or 2020 tax receipts remain lower then we’ll know the tax cuts did not have the desired result, i.e., stimulating faster economic growth in the US economy. My guess is tax receipts will soon begin to increase.


  2. If, in fact, we have made up our collective minds that deficits really do not matter – which it seems across the board we have – then why continue to wring our hands over the mountain of debt and associated interest costs we have chosen to accumulate when there is any easy solution? Just print the money and pay the debt and problem solved. Of course that would expose the FED’s big-bank cut-out QE quackery, but rest assured that is coming, it is only going to take a little longer, that’s all.

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