Conclusion: The U.S. deficit issue continues to accelerate. February 2011 was the largest monthly deficit ever, and ever is a long time.
Position: Short the U.S. Dollar via the etf UUP
Due to seasonality, February is typically a bad month for the federal budget deficit. In fact, before February 2011, the prior worst monthly deficit on record was February 2010. According to estimates from the Congressional Budget Office (CBO), the Federal budget deficit for February was $223BN which is an increase of about 1% from February 2010.
Revenues actually grew year-over-year by 3%, which is marginally positive. This is also the 10th straight month of year-over-year revenue increases. On the flip side, and despite all of spending cut rhetoric, expenditures were up 5% from February 2010. The key driver here was a $4BN increase in interest expense, which was a function of more debt and marginally higher rates.
In the table below, we’ve outlined the year-to-date deficit numbers compared to 2010. As usual, we’ve normalized for one time expenditures, such as TARP. While revenues are showing a decent increase on a year-over-year basis, spending continues to accelerate and is up more than 5.3% in the first five months of the fiscal year. The largest gaining expenditure line item on a percentage basis year-over-year was interest expense.
Year-to-Date Deficit ($B)
To the last point on the growing expense of interest, a recent report written by Mary Meeker on behalf of Kleiner Perkins titled, “USA Inc”, highlighted the heightening threat of interest to the federal deficit. According to Meeker:
“Last year’s interest bill would have been 155% (or $290 billion) higher if rates have been at their 30-year average of 6% (vs. 2% in 2010). As debt levels rise and interest rates normalize, net interest payments could grow 20% or more annually.”
The sneaky thing about borrowing money is that the cost of borrowing increases the more you borrow.
In conjunction with writing this note, we took a look at the longer term budget history of the United States. In the chart below, we show the budget deficit going back to 1968. The chart shows a somewhat normal distribution of deficit spending and reduction and then beginning in the 2000 time frame, the deficit train wreck began.
Given this February data and the long term trend, it is no surprise that we re-shorted the U.S. dollar today in the Virtual Portfolio via the etf UUP. In God we trust, but not in debt.
Daryl G. Jones
Managing Director
