On Thursday. The U.S. Treasury released a terse announcement:
“Beginning on February 3, 2011, the balance in the Treasury’s Supplementary Financing Account will gradually decrease to $5 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy.”
The Treasury’s Supplementary Financing Program is designed to help counteract some of the negative effects of the Federal Reserve’s efforts to inject liquidity in the economy. It’s basically an accounting mechanism that aims to absorb some of the excess reserves created when the Fed buys assets — like crappy mortgage-backed securities. Right now, the account holds around $200 billion.
But as of Tuesday, according to the Treasury, the U.S. government is only $279 billion away from hitting the debt ceiling. So for the time being, the Treasury is rolling up the Supplementary Financing Program so as to free up some cash, and postpone the debt ceiling reckoning for a little while longer. The Treasury did exactly the same thing the last time the U.S. threatened to hit the ceiling, so there’s nothing particular striking or unusual about the move.
However, two other news items in the last 24 hours underscore how serious the longterm budget situation is, and are likely to affect the outcome of negotiations between the White House and Republicans over extending the debt ceiling. Standard & Poors downgraded Japan’s credit rating and the Congressional Budget Office reported that, largely as a result of the tax-cut deal, the budget deficit this year will be $1.5 trillion.
Japan’s downgrade is a warning shot: At some point, $1.5 trillion deficits will finally begin to upset the markets. In their explanation of the downgrade S&P cited Japan’s lack of political will to deal with their government finances. The same is abundantly true for the U.S. Any realistic appraisal of the U.S. fiscal situation has to conclude that a mixture of revenue increases and spending cuts is imperative for the long run. Instead, we’re busily decreasing revenue and making only trivial cuts.
I’ve been arguing here for years that it is critical not to go overboard on fiscal austerity when the economy is still fragile, because that would be entirely self-defeating. If you remove government demand from the economy, you could have slower growth, which means even less tax revenue, which puts even more strain on government finances. But the question then becomes, when? When is the right point to trim sails?
Yesterday’s upbeat new home sales data inspired the private forecasting firm Macro Advisers to double down on their prediction that GDP growth for the first quarter will be a very robust 4 percent. On Friday, the government will release its first stab at estimating fourth quarter growth, and the consensus prediction right now is around 3.7 percent. If that level of growth is sustained for a two or three quarters, then the pressure to deal with the U.S. fiscal imbalance will ramp up considerably. And maybe it should.
On the other hand, Thursday’s huge 51,000 jump in jobless claims injects a new note of uncertainty into the equation. The Labor department is blaming snow for a backlog of claims, but that’s still a horrible number, no matter how bad the weather.
And so we march forward, into a pea soup-thick fog of baffling uncertainty.