Fuzzy Treasury Math and Its Consequences

(Note: A version of this appeared on AlterNet earlier this week). If it sounds too good to be true, it’s probably false. Especially if it involves math, the Treasury Department, and two disparate political camps championing two different economic doctrines.

Yet, so goes the current telling of the deficit story. When the Congressional Budget Office (CBO) proclaimed that its projected deficit for 2013 had dropped to $642 billion, there was nary a question asked about how that number was conceivable.

Real-wage stagnation, epic student debt, more low-paying half-jobs accepted out of desperation than moderate-paying full-ones being created, health costs out of control, an ongoing Congressional war over sequestered funds, more federal debt being created even if tempered by zero-interest-rate policy and yet, the media jumped on the make-believe-bandwagon of an incomprehensible turn-around in the government’s books, where the deficit had grown as a direct result of debt created to float the banking system. Somehow the deficit had magically nearly-halved from around $1.1 trillion last year.

A battle of philosophies

When the deficit was announced to have undergone some kind of Fastest Loser diet, Keynesian types were thrilled that their philosophy was validated. The wondrous number, the ‘smallest shortfall since 2008’,  proved fiscal stimulus would ultimately boost the economy.  (Leave aside that John Maynard Keynes was actually an asset manager and successful speculator.) 

Where there is truth to part of this  (austerity never helped anyone but those not impacted by it) it ignores the fact that a vast portion of stimulus has been mirrored by a policy of cheap money, asset bubble manufacturing and providing a parking spot for Treasury and bank debt on the Fed’s books. Nearly 80% of the Treasury debt created since the financial crisis of 2008 has not been raise to even plug a deficit, but to float a flawed financial system. Still, blind acceptance that any federal stimulus helps the population and not its financial institutions does economics and more importantly, the country, a disservice.

Free-market types also considered the reduced deficit a philosophical triumph. By not overly helping or regulating the market (score another one for watering down the already tepid Frank-Dodd Act), the economy is marching back to normal on its own. See! So more budget cuts of social, but not corporate, welfare are necessary.

But blind-belief in the headline figure weakens their cause, too. A true free-marketer would be against the Federal Reserve propping up the treasury department and the debt market by printing money, buying lots of new treasuries, or allowing banks to park them on their books (to the tune of more than $1.5 trillion worth in excess reserves) and by buying $85 billion in toxic assets per month from banks shifting their rotting positions to the Fed, thereby freeing up space to speculate in other ways, in a well-orchestrated accounting gimmick.

Those debates of course will continue on. Meanwhile, there’s the matter of what sparked them - the CBO’s estimate of the 2013 deficit, the number that measures what the government takes in vs. what it spends. Examining it, shows that not much has changed in the past three years. 

First, a hat tip to Karl Dennniger at Market Ticker for boldly going where much of the media seemed too complacent or clueless to go.  According to Denninger’s analysis of Treasury data, since September 28th 2012, “there has been a net $762.6 billion of new debt added to the Federal balance sheet, not the $488 billion the Treasury Department claims.”

He shows how the Treasury’s cash statement indicates that “At the current run rate … the deficit on a cash basis this year is $1.188 trillion” compared to $1.210 trillion last year, or,  about the same.  If you include figures through the end of April, that run rate produces a deficit of about $1.307 trillion.

Regarding the $642 billion headline deficit number, simple logic (and a read of the news) showed that neither US debts, nor its largest expenditures had dropped.  At first, I just assumed the Treasury Department was excluding something major from the figures that the CBO was using - but the math doesn't work even if it excluded lots of costs or pumped up lots of revenues.  

The Truth is In there

The evidence of the real deficit projection lies in the Treasury's own report of receipts and outlays, the Monthly Treasury Statement which compiles activity from the start of the current fiscal year (October 2012) through April 2013. 

A cursory look at this report reveals items that ulimately don't support the CBO’s cheery projections. (Warning: there’s some math coming up.) Take Table 1. Its shows there have been $1.603 trillion in budget receipts so far for fiscal year 2013 vs. $2.090 trillion in outlays. This indeed produces a value for a current deficit (outlays minus receipts) of -$487 billion.

The same table (and also Table 2) shows there were $1.383 trillion in receipts for the same period in 2012 and $2.103 trillion (about the same as this year) in outlays. Combining those figures, we do get a  comparative deficit this time last year of -$719 billion.  Okay, so far, so on point with the headline cheer.

However. Just below Table 1 comes some small print. The Treasury Department appears to have changed some accounting methods: "The deficit figure differs by $2.23 billion due mainly to revisions in the data following the release of the Final Monthly Treasury Statement."  There’s no clarity on how those revisions worked and they are small in the scheme of things, so let’s raise an eyebrow and move on – to the good part.

The Fuzziness

Even if the rest of this year's receipts continue to come in 16% greater than they did last year (which is what this table shows so far) - and there’s no particular reason why they should -  we'd get total receipts of $1.603 trillion plus an additional $1.237 trillion. That equals $2.839 trillion in total receipts for 2013. Remember that number for a moment.

Now, consider that even if  the rest of this year's expenditures remain flat to last year, there would be $3.538 trillion in total outlays for 2013. Subtracting that $3.538 trillion in outlays from $2.839 trillion in receipts, yes, we do get a total deficit projection of around $698 billion, about $56 billion higher then the figure the CBO announced, but what’s $56 billion give or take between friends?

Yet there’s more.  There’s Table 2. According to Table 2, expenditures won't be flat; they will be higher, and reach $3.684 trillion.

Subtracting $3.684 trillion from $2.839 trillion, we get an expected deficit of $846 billion, not the $642 billion figure that the media spread. Again, what’s about $200 billion between friends? But, adding in the extra debt from Denninger’s analysis of reports, that isn’t in this report, of $275 billion could put the real deficit figure closer to $1.12 trillion, where it’s been for the past three years.

There’s always some danger in working with numbers and estimates. The financial crisis predicated on mortgage prices and related assets rising quickly after speed bumps (which is what former Treasury Secretary, Hank Paulson said they'd do in 2007) showed us that. Numbers can be massaged and shrouded with suppositions.

But, that’s not the full case here. This is a case of performing addition and subtraction using the Treasury’s own report. And doing so, even absent wondering about assumptions or potential illusions, reveals a discrepancy between the recent headline deficit number and the one in the report.

Before we can discuss whether government stimulus works or not (and more importantly how programs are designed and who they benefit; sometimes people, often banks and corporatios), we should ask why some people are so eager to accept numbers or be right about the forest, that they run smack into the trees. Let’s at least see the main tree, here – the actual deficit figure - and then, we can move onto economic doctrine discussions. 

Can't blame economic policy on Osama

When William Shakespeare penned the words, “All the world’s a stage“ in, As you like it, it was centuries before tense photos of tense leaders would show tense concern over tense military operations.

What transpired around the killing, or killing announcement, of Osama bin Laden has been astounding. Whether you believe that bin Laden was “taken out” by this NAVY Seal operation, after nearly a decade, two wars, an over 81% increase in the military budget, and thousands of deaths, following the tragic loss of life on 9/11, or whether you believe he was dead and iced years ago and strategically used as a sign of unflappable leadership, is irrelevant. The surrounding uproar was theatre of the extravagant, no matter how you slice it.

But, theatre was invented for distraction, in culture and in politics. So while all the Osama drama was unfolding, the Treasury Department issued another plea for raising the debt ceiling, aka supporting its pro-bank policy. It went something like this:  We need to borrow more to pay social security obligations and not default on our debt, so other countries won’t question our ability to manage an economy  (as if that hasn’t already happened) and we won’t have to pay more to borrow more. If we don’t – you know what’ll happen – yep, another financial crisis.

The actual quote was: “The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”

Though technically correct, omitting the fact that our leaders chose to float the financial system on such an unprecedented scale with no obvious Main Street benefits - hence the massive and quick debt increase - continues to show an aversion to reality.

Flashback five years. George W. Bush’s second Treasury Secretary, John Snow, pled the same thing. (He wasn’t unique, of course, Congress has acted at Treasury Secretary request to raise the debt ceiling 78 times since 1960, 49 times under Republican presidents, 29 times under Democrats.) Snow threatened he was being forced to cut payments to civil servants, among other things, but didn’t mention the real reason for the debt hike requirement, like the Iraq war or the tax cuts that stifled revenue collection. He had used similar arguments at the end of 2004, at a time when the debt ceiling was about half what it is today.

Raising debt ceilings is a bi-partisan institution. The show is always the same. The Treasury Secretary begs Congress. Congress debates than agrees. No one questions the real reasons we pursued the excess borrowing.

Since Snow made his plea, a number of things happened; a continued war, an extra war, a collapse of the financial system, a subsidization of the financial system, a decline in employment, home prices, average wages for most of the population, and an increase in foreclosures, executive bonuses, and personal bankruptcies.

Hitting the debt ceiling isn’t about spending gone haywire because the Social Security and Medicaid buckets are too small for the people that rely on these programs; it’s about the big-ticket items– like recently, bailouts.

Here are some terms and numbers, intentionally blurred by those that control them. Feel free to jump ahead:

The total US debt is a combination of two things: the public debt (the amount of securities the Treasury issues in order to borrow money from international or national investors) and intragovernmental holdings (the amount of borrowing done from funds like the Social Security trust fund.) Public debt is always higher.

As of April 30, 2011 – the public debt stood at $9.63 trillion dollars and intragovernmental debt at $4.6trillion (68% and 32% respectively of the total debt of $14.24 trillion vs. a debt ceiling, or cap, of $14.294 trillion.)

In April 2010, public debt was $8.41 trillion and intragovernmental was $4.48 trillion (65% and 35% respectively of the total debt.) In April 2009, public debt was $6.91 trillion and intragovernmental was $4.27 (62% and 38% of the total debt. The debt cap then, was $12.14 trillion.

In April 2008, just after federal subsidization of the sale (read: hostile takeover) of Bear Stearns to JPM Chase, and before the rest of the big bailout began, public debt was $5.22 trillion, intragovernmental was $4.08 trillion (56% and 44% of the total debt.) The debt cap then, was $9.815 trillion.

In April 2007, public debt was $4.97 trillion, intragovernmental was $3.78 trillion (57% and 43% of the total debt.) The debt cap was $8.965 trillion.

Basically, what all these numbers show is that; public debt has nearly doubled since before the big bailout, while intragovernmental debt has increased just 15%.  Some (like Geithner, Bernanke, etc.) may argue that this balloon in public debt was required to save our economy, though there’s little evidence of it doing anything but cheaply floating our financial system, not least because nearly half of the additional $4.4 trillion of public debt that was created is stashed at the Fed as either excess reserves, QE1, or QE2. 

Now that the Osama drama has died down a bit, and Congress returns to economic discourse with Tim Geithner over not whether, but by how much, the debt ceiling will be raised, the partisan bickering will resume its thunderous levels of inanity.

No one on the Hill will question the true why behind the debt – because it would lead back to that mammoth fuchsia elephant - we, the elected and appointed, screwed the country to support the power banks, and we’d do it again, in fact, we already are.

With respect to bin Laden, conflicting stories will go on forever – when did he die?, whose body is in the ocean?why didn’t Obama release a photo? But with respect to the economy, it’s super clear -  our debt ballooned and our economy deflated, to subsidize banks and their practices, period. We can’t blame that on Osama bin Laden.

Treasury's Titillation over TARP and budget increase

The Treasury department spends an awful lot of PR time extolling the success of the TARP program (and never mentioning any of the other myriad of bank subsidies and guarantees provided outside the realm of Congressional approval that rendered the $700 billion program a small percentage of the financial aid package to Wall Street or a peep about the $4.1 trillion of debt it issued since the fall of 2008, $ 1 trillion of which rotated through banks and into historically high excess reserves at the Fed).

Good for them.  Today, Geithner spewed another projectile of self-pride over the $24 billion profit we taxpayers are gonna reap from his stellar investment in reckless banks and risky assets. This silenced the critics, as one commentary pointed out. Sure, cutting us a check wasn't the point - I mean, if it was successful betting he was going for, the $700 billion of TARP money put into say, silver , would have bagged us $2.1 trillion.  

But, TARP only appears to have worked if you ignore the shell-game that surrounded it. Without the amount of collective federal support, including the lavishing of guarantees, toxic asset purchases that remain on federal books, the abolition of accounting requirements that would force banks to reveal the real risk in their existing loan portfolios, the cheapening of money to historically low levels by the Fed's QEX efforts, and the very notion that the Treasury department was the banks' financial cushion,  banks would have not been able to repay the isolated TARP handouts with interest. They wouldn't have had the money from other avenues to use. It's meaningless to consider this a savior type of economic strategy. Aside from which, the CBO tallied the budget cost of TARP at $25 billion, so at best, the shell-game paused at a wash.

On a separate note, if TARP was so successful, why is Geithner requesting a 14.2% budget increase for the Office of Inspector General. It may be small potatoes after his $24 billion windfall to quibble over a $5 million dollar hike, but  given the noise about the program winding down in this time of budget banter in Washington, and unless the next SIGTARP stepping into Neil Barofsky's shoes is getting a $5 million raise,it seems excessive. Just saying.