Budget Deficits and Gold

Budget deficits and gold. 

Deficits keep rising.

Biden Budget

Biden released his budget forecasts.

What strikes me is that the 10 year yield will be lower than today, which benefits gold. Debt and deficits will continue to rise by $1.5 trillion per year. So you can forget that the U.S. will ever get into surplus. Which means the U.S. dollar can only go lower.

U.S. Budget Deficit Tops 5 trillion

The U.S. has been spending like no tomorrow in Q2 2020.

The deficit to outlay ratio has ballooned to 60%. This above the threshold of 40% which means we are going to see hyperinflation in the U.S. for more info read this.

U.S. dollar will have a correction

The U.S. dollar is overdue for a correction to the downside as budget and current account deficits balloon. To bet on this, you should of course buy precious metals.

A Look At The Ministry of Finance Japan Draft 2016 Budget

One year has passed and Japan has not deteriorated as many analysts predicted. The Japanese stock market has gone up 10% since last year, the yen has been flat against the U.S. dollar, the Japanese housing market is rebounding, real GDP is at 1% and people who invested in the Japanese bond market didn't lose any of their money.

I mentioned in a previous post last year that Japan's situation wasn't that bad at all. The current account was improving, the budget deficit was contained, bond yields were falling and I said that the benefits of the restart of the nuclear reactors was going to boost the economy of Japan. Well, two of the 48 nuclear reactors have been restarted and many more are going to be restarted as approvals are underway. With this in mind, let's see how the fiscal situation will look like in 2016.

Go here for the analysis.

Ministry of Finance Japan Issues 2015 Budget: The Trend Is Actually Improving

Japan has been in the news a lot in 2014 because of its deteriorating fiscal situation. The Ministry of Finance Japan has approved the 2015 budget and a new report on the fiscal situation can be found here. I'll summarize my findings in this article.

First, let's focus on the trade and current account deficit in Japan. Both have been deteriorating rapidly in 2013, but since 2014 something has changed. The yen (FXY) has been plunging in 2014 (see chart below from Yahoo), just like it did in 2013 and that suggests that we would see large current account deficits and budget deficits going forward, but the opposite is happening.

The latest current account number in October 2014 was a surplus of 833.4 billion yen. The reason for this is because Japan's pension funds (which are the largest in the world with more than $1 trillion in assets) invested heavily in overseas stocks and they are planning to increase this exposure to 25% of their fund. As we all know, the U.S. stock market has been on a tear and Japan's current account has benefited from this (see chart below from tradingeconomics).

Exports are on the rise but haven't improved a lot if you account for a weaker yen (the yen plunged 20% in 2014 while exports rose only 10%). The trade balance is still negative, but somewhat improving because import costs for oil and gas have declined in 2014 (34% of total Japanese imports is energy). The latest November trade deficit figure came in at 891.9 billion yen (see chart below from tradingeconomics). This number is likely to improve as Japan's nuclear reactors are starting to come online in 2015.

To continue reading the analysis on budget and interest payments, go here.

Interest payments as a percentage of tax revenue: Fiscal Year 2013

As fiscal year 2013 passes by we note that the interest payments as a percentage of tax revenue has declined over the past year (Chart 1: red line). The number came in at 13% and wasn't due to a decrease in interest payments.

Chart 1: Interest Payments

 As a matter of fact, the interest payments went up this year due to higher debt and higher interest rates (Charts 2 and 3).

Chart 2: U.S. Debt Vs. Interest Payments

Chart 3: 10 Year U.S. Bond Yield Vs. Interest Payments

The reason why we see a decline in the interest payment to tax revenue ratio is because of the huge increase in tax revenues the government received this year (Chart 4).

Chart 4: U.S. Government Tax Revenue

This was all due to a tax increase at the start of 2013 (Chart 5: blue line), which plunged the savings rate (Chart 5: red line) of households.

Chart 5: Tax Revenue Vs. Savings Rate

All in all a pretty positive year for the U.S. budget.

The question is, what can we expect from the coming year? The projected tax revenue is going to follow this trajectory according to the Federal Budget. This is more than enough to pay for the increase in interest payments due to higher public debt and higher interest rates. It will all depend on what Janet Yellen will do. If she decides to increase QE, we might see even lower interest payments due to lower interest rates.

Chart 6: Projected Revenue

Budget - Trade - Current Account Deficit

It can be interesting to watch how the budget deficit, the trade deficit and the current account deficit evolves over time. As I said before, deficits are inversely correlated with the currency value. Ever since 1970, the U.S. dollar decreased in value as deficits went up. The following chart gives the annual budget - trade - current account deficit.

The budget deficit (yellow chart) is a measure of how much the federal government is spending more than it receives. The budget deficit = Federal government spending minus Federal government receipts. We currently have an annualized $1 trillion budget deficit.

The current account (BOPBCA) (green chart) is simply a measure of how much money is flowing out of the country compared with how much is flowing in from foreign sources.

The balance of trade (BOPGSTB) (red chart) is the biggest part of the current account. It measures the value of what we sell overseas minus what we buy from overseas. The U.S. trade deficits started since 1970, when the U.S. started to import a lot of oil and consumer goods.

The U.S. has a trade surplus in services and a trade deficit in goods.

The trade balance can be predicted by looking at air freights.

Import and export air freights.

Import and export of all commodities.

Imports and exports of goods and services.

 

High deficits lead to currency devaluation.

 

The current state of the budget deficit:

Pentagon Slashes 6% of Workforce

As a follow-up on this post, where I pointed out that the debt ceiling is taking its toll on the workers at the Pentagon, today we were notified that of the 800000 employees at the Pentagon, 46000 will be terminated as of today. Although this is but a small percentage (6%), it still points out that the budget of the U.S. is in trouble.

If the March deadline on $50 billion budget cut isn't resolved, Pentagon employees will have to work 1 day less each week from that day onwards.

The moral of the story is that money is critical for the defense sector of a country. No money means no security.

Analysis of Deficits to Outlay Spending Ratio

I already talked about how the U.S. budget deficit is skyrocketing in this article. Reason was that outlay spending has outpaced government tax revenues since 2008.

I decided to make another chart of this going to the early 1980's. As James Turk stated, when governments start to borrow more than 40% to fund their outlay spending, then we have come to a hyperinflationary scenario.

To see what this chart means, go to: the full version of this article.

Chart 1: Deficits (+)/Surplus (-) versus Outlay Spending Ratio