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Deficits & Lame Ducks, Part 3

David R. Kotok
Sun Apr 7, 2024

Here’s more on the Deficits, Debt and Lame Ducks. Note that since our previous writings the No Labels party has announced it will not field a presidential candidate. For my two earlier pieces, here are the links:
“Deficits & Lame Duck POTUS,”
“Deficits & Lame Ducks, Part 2,”
Bruce Mehlman was kind enough to give us permission to share the first two items of his usual Sunday column. Bruce is on Substack, and I subscribe and read him on receipt of his missives. You can find Bruce here: “Age of Disruption,”
These two items and graphics speak for themselves. 
1. Debtors-in-Chief: America’s first 42 Presidents racked up 30% of our national debt, while the four 21st-century Presidents are responsible for 70%. Trump and Biden combine for about one third of the total (~$12.4T).
Deficits & Lame Ducks, Part 3 - Total U.S. National Debt Pie Chart
2. The deficit divide: Republicans express far greater concern about “federal spending and the budget deficit” than Democrats. In fact, it’s the issue with the largest gap between Democrats and Republicans in Gallup’s March poll. Unclear whether it will advantage either candidate in November, though, given that both have significant red ink on their hands.
Deficits & Lame Ducks, Part 3 - Issue Concerns by Party ID Poll

Let me get to the issue at hand.

IMO, the debt issues involving the United States are not just about the size of the federal debt; they are also about the composition of the total debt. US-dollar-denominated debt of all types is now in excess of $70 trillion. Tradable federal debt is about $27 trillion. We subtract the debt that the government holds in federal agencies and other governmental accounts since the government really owes that to itself. 
The system of pricing federal debt in the market is now influenced by the pricing of the credit default swap (CDS) on the United States. Each basis-point change in the CDS implies an estimated $27 billion annual running cost of financing the federal government and all its agencies. 
After the Congress passed the near-midnight budget and the House recessed, a single Member of Congress, Marjorie Taylor Greene of Georgia, filed a motion for the vacating of the Speaker chair. Green was playing her disruption-card politics to threaten Speaker Johnson who had finally permitted a vote to have the United States proceed with a budget. So, what happened? Immediately following Green’s disrupting action, the pricing on the CDS at the 10-year maturity immediately changed by 1 basis point. IMO, Greene singlehandedly raised the implied financing cost of the United States by $27 billion a year. 
Does she understand this? Who knows? Do her constituents? Most of them probably do not. Is she pandering to the political base in her district by tossing around this political “raw meat?” It sure looks like it. 
The 10-year CDS pricing on the United States of America is now over 47 basis points. As you can see below, it was a lot lower on Jan. 1, 2023. Here’s the chart. The businesses and boardrooms of the United States are the ones that are paying this cost, along with all the citizens.  Politics has raised the cost an estimated $400 billion a year. (Change since 1/1/23 is 15 bps times $27 bn=$400 bn, annually.)
You decide. 

CDS for 10-year US Treasury debt
Deficits & Lame Ducks, Part 3 - CDS for 10-year US Treasury debt Chart


David R. Kotok
Chief Investment Officer
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