Recently we’ve been thinking about the dramatic changes that the U.S. government has gone through to keep us out of a depression.
In the past year, the U.S. government has taken over much of our domestic banking and auto industries. Through its support and purchase of loans from Ginnie Mae, Fannie Mae and Freddie Mac it has kept the residential housing mortgage business alive. And it has used the Term Asset-Backed Securities Loan Facility (TALF) to restart the global credit market.
These bailouts have dramatically changed the financial position of the federal government. Two sources in particular have caught our attention recently.
Federal Government Debt, Part 1
One of the experts that we follow is Milton Ezrati, the lead economist for Lord Abbett Mutual Funds. In a recent article, Ezrati outlined some of the basic changes that have occurred in both the government’s revenues (taxes) and spending during 2008 to fight the possibility of ending up in a depression. Here are some relatively scary statistics:
2008 Federal Government Revenue Decreases
- “Revenues from tax withholding on wages and salaries fell (only) 6 percent from the same period in 2008. Still, because these revenues are such a big part of the overall tax take, this decrease added some $89 billion to the overall revenue shortfall from last year, about one-quarter of the total amount. About one-third of it, or $30 billion, according to the Treasury, came from the “Making Work Pay” tax credit in President Obama’s economic stimulus package, called the American Recovery and Reinvestment Act [ARRA] of 2009.
- Corporate tax revenues fell sharply, by some 57 percent from last year, depriving the Treasury of some $141 billion or about 40 percent of the total. Much of this shortfall reflected the economy-wide decline in profits of 18%, but some $70-80 billion of it came from provisions in the recent legislation that accelerated depreciation schedules and that allowed firms to use current-year losses to reduce tax liabilities from previous years.
- About $123 billion, or more than one-third of the overall revenues shortfall, came from refunds on 2008 taxes and downward adjustments in 2009 estimated taxes, mostly from small business. Almost all of this loss reflected the recession, though some also developed from the same tax relief as corporations enjoyed.
- Some 5 percent of the overall revenue shortfall resulted from lower receipts from the Fed due to lower interest rates and write-downs on assets acquired from Bear Stearns and American International Group (AIG).
2008 Federal Government Spending Increases
- Some $252 billion, or nearly half of the overall jump in spending, came from disbursements under TARP and for Fannie Mae and Freddie Mac.
- New claims for unemployment insurance lead to increases in spending by $59 billion and Medicare by $39 billion, though not all of this was due to the recession. Together, these increases accounted for a bit less than 20 percent of the overall rise in outlays compared with last year.
- About one-third of the overall spending increase, or approximately $188 billion, came from ARRA provisions that had the federal government temporarily pick up Medicaid costs for the states. Increased outlays to Social Security recipients added, too, as did the legislation’s new State Fiscal Stabilization Fund and its enlargement of food and nutrition programs.
- Increased defense spending added about $40 billion, compared with last year, or some 7.5 percent of the total rise in outlays.
Lower interest rates actually reduced outlays to pay the interest on the national debt. Were it not for this effect, outlays would have been some $52 billion higher than they were.
Disconcerting as these developments are, the longer-term outlook gives even more reason for concern. According to estimates released by the Office of Management and Budget (OMB), the administrator expects deficits to remain between $1.0-$1.5 trillion through 2011, and stay well above $500 billion thereafter, so that the outstanding debt of the United States in the public domain will rise, according to OMB estimates, to above $12 trillion by 2012, or to about 70% of GDP, up from some 41 percent in 2008. Even these ugly figures rest on an assumption of implausibly rapid real GDP growth of 3.5-4.5 percent a year for four years. If, as seems likely, the economy grows at a slower rate, the fiscal healing, such as it is, will make even less progress. The shrinking deficits also count on reduced defense spending by some $55 billion in 2010, and $150 billion a year on average from 2011 through 2013, which seems legislatively unlikely in today’s geopolitical milieu.
Bottom line, it is going to be a while before we are able to better manage our federal budget deficit.”
–Milton Ezrati
Source: http://www.lordabbett.com/insights/fiscal_follies.pdf. Published Sept. 8, 2009
Federal Government Debt, Part 2
According to Heidi Moore, a writer for The Big Money a web site on the economy and investing, the federal government is also the biggest buyer of federal government debt this year. Here’s how she describes it:
“The U.S. government has auctioned $7 trillion of Treasuries this year alone to help fund the bailouts – $1 trillion more than it did in 2008. And who is buying all those Treasuries to help fund the bailout? The Federal Reserve, which owned $4.875 trillion of Treasuries as of March, making it the biggest holder of U.S. government debt. The Fed is also the biggest continuing buyer of Treasuries, snapping up 48 percent of the $339 billion in net new Treasuries sold as of the second quarter, according to The Wall Street Journal, and is poised to dominate again as the Treasury auctions off a record $112 billion in bonds soon. In short, the Treasury is issuing bonds to fund the bailouts so the Fed can buy the bonds to fund the bailouts that the Fed helped create.”[Emphasis added]
Source: http://www.thebigmoney.com/articles/judgments/2009/09/24/biggest-government-bailout-yet-come Published Sept. 24, 2009
What will happen to these markets when the U.S. government slows down its rate of borrowing and spending on these programs? Will the private markets and capitalism take over and stabilize everything? Or, will this prove to be a problem that will affect investment markets for many years to come?
We think the latter is more likely.
