Broad U.S. money supply (M3) surged $33 billion last week to a record $8.132 trillion, and is up $104.6 billion in four weeks. For the week, savings deposits jumped $21.2 billion and institutional money fund assets increased $17.3 billion, while repos declined $2.7 billion and demand deposits declined $5.1 billion. We don’t view it as coincidence that money supply returned to rapid growth simultaneously with the heightened systemic risk that developed over the past month. As we have discussed often, the U.S. financial sector enjoys, for now, the capacity to create its own liquidity. Bloomberg’s tally of domestic debt issuance had $34.8 billion of new securities sold last week. The asset-backed security issuance boom runs unabated, with $12 billion sold last week. Year-to-date issuance of $138 billion is running 16% above last year’s record pace. Issuance of securities backed by home equity loans is up 62% to almost $51 billion.
In another in my ongoing “More Detail Than You Want to Know” series, we’ll dive this week into April’s “Monthly Treasury Statement of Receipts and Outlays of the United States Government.” With tax returns due, April is always the Treasury’s big surplus month for the year. This year’s monthly surplus of $67.2 billion was down 65% from April 2001’s $189.8 billion. For comparison, April surpluses averaged $147 billion during the past four years, with last month’s surplus the smallest since 1995. The amazing disappearing surplus was made possible by the combination of a 28.4% year-on-year decline in April receipts and a 19.8% jump in spending. The monthly numbers can fluctuate significantly based on the timing of receipts and payments, so we prefer to look at year-to-date data.
For the first seven months of the fiscal year, receipts declined 11% to $1.116 trillion. Meanwhile, spending jumped 9% to $1.182 trillion. Fiscal year-to-date, last year’s surplus of $165 billion has been transformed into this year’s deficit of $66 billion. The perception is that a “moderate” deterioration of the government’s fiscal position is due to the recession and jump in defense expenditures. Well, should a mild recession have had such major impact? We think there is much more going on here than a brief recession or increased military expenditures. Indeed, the alarming aspect of the rapid fiscal deterioration is the broad-based character of spending increases.
Year-to-date by major category, Interior Department spending increased 33% to $6.1 billion, State Dept. 23% to $6.07 billion, International Assistance 16% to $10.7 billion, Energy Dept. 15% to $10.9 billion, Dept. of Justice 16% to $14.6 billion, Civil Defense 3% to $20.5 billion, Housing & Urban Development 9% to $19.9 billion, Labor Dept. 61% to $34.4 billion, Education Dept. 11% to $26.4 billion, Veterans Affairs 10% to $28.7 billion, Transportation Dept. 24% to $33.9 billion, Office of Personnel Management 3% to $30.7 billion, Agriculture Dept. 7% to $48.1 billion, Defense 14% to $187.2 billion, Health and Human Services 11% to $266.3 billion, and the Social Security Administration up 7% to $280.4 billion. Partially offsetting increased spending, interest expense declined more than $20 billion y-o-y, or 10%, to $181 billion.
It is interesting to dig a bit deeper into the surge in defense spending. Personnel expenses are surging, with y-t-d personnel spending up 18% at the army, 16% at the navy, and 20% at the air force. “Operation and Maintenance” expenses are up 10%, 10%, and 9%, respectively, while surging 43% at the “Defense Agency.” “Procurement” costs jumped 11% for the army, 8% for the navy, and 25% at the air force. Defense Dept. research and development expenses are up 8% y-t-d. Looking at the Dept. of Health and Human Resources by major category, spending at the National Institute of Health jumped 20%, payments to health care trust funds surged 24%, and grants to states for Medicaid increased 14% y-o-y. At the Dept. of Labor, y-t-d unemployment insurance benefits are up 77%. The Social Security Administration saw benefit payments jump 5% and disability disbursements rise 10%.
The revenue side is also rather illuminating. Y-t-d individual tax receipts are down 19% to $536.5 billion. This is basically a return to the levels of Oct. 1998 to April 1999. And while personal withholding tax receipts declined 6% year-over-year to $463.9 billion, “other” personal tax payments sunk 26% to $198 billion. Clearly, the transformation of enormous stock market capital gains to losses is conspicuous in the data, as the $70.5 billion y-o-y decline in “other” (non-withheld personal income taxes) explains half of the y-t-d decline in total receipts. In this regard, it is worth noting that “social insurance and retirement receipts” – taxes calculated based on wages up to a maximum - actually increased 2% y-o-y. We’ll take this as evidence that the average wage earner made it through the shallow recession relative unscathed, while the upper-income equity market-exposed took it on the chin. At the same time, y-t-d corporate tax receipts are down 15% to $88.2 billion. For comparison, corporate tax receipts were $103.3 billion for the comparable period Oct. 98 to April 99.
We are not of the view that government deficits directly cause inflation, as much as they tend to be a reflection of, as well as augment, underlying inflationary pressures. Clearly, federal spending is playing a role in what we view as the changing character of inflationary forces. For years, the keenest inflationary pressures were found in the stock market and within the “upper end,” whether it was executive compensation, employee stock option proceeds, or luxury home prices. Such inflationary manifestations for the most part bypassed consumer goods prices. Today, with lower-end housing prices outperforming, wage growth remaining resilient, huge government spending increases, and a weakening dollar, we see additional support for our view that the surprise going forward could come in the form of heightened traditional consumer price inflation. At the minimum, it is worth noting that while enormous stock market gains were quite beneficial for state and federal government coffers during the boom, the tax structure is not so helpful for governments in regard to today’s housing Bubble.
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