Is the US Facing a Cash Crunch?
The US cash-management challenge is significant, and any surprises or further delays in economic rebound will likely trigger serious market reactions.
The US government is caught in a cash vise and is being squeezed between too slow a rebound in tax revenues and the limitations on how quickly it can realistically take its funding requirements to the US Treasury auction. The US Treasury was saved in March by what the government reports as “proprietary receipts.” Those receipts require an explanation that isn’t well publicized since it begs the question of what happens next month without the $117 billion journal entry.
The March cash management numbers from the US Treasury’s Financial Management Service are alarming and in my estimation have become perilous. The economy is simply taking much too long to recover, which is affecting urgently required tax receipts.
If the US Treasury issues even higher debt supply to the market too fast, it threatens driving up interest rates prematurely and thereby elevating already strained government financing costs despite already increased supply. Since the US government has steadily reduced maturity duration over the last few years to obfuscate a growing debt problem, the issue is compounded by the rapidly increasing levels of rollover funding now additionally being required.
It’s a tricky balance between gauging how fast tax receipts will return and what supply the monthly Treasury auction is able to absorb. Cash flow is the primary reason small businesses fail unexpectedly. This is also why sovereign governments fail abruptly.
We witnessed in Greece what happens when investors get nervous. Yields not only spike but typically move to even higher levels than most originally thought possible.
US Treasury Cash Requirements
On April 14 the Financial Management Service, a bureau of the US Department of the Treasury, released its Monthly Treasury Statement for March 2010. I was waiting for it because of what I saw in February: The gap between receipts and outlays was widening disturbingly.
I knew the US Treasury was going to have to pull a rabbit out of a hat, or we might see a similar scare in the US Treasury auction, with a spike in treasury yields that occurred in Greece. What was reported was a mystery and for those that read Extend & Pretend: Gaming the US Tax Payer, I’ll call this Suspicious Clue #8.
Suspicious Clue #8
The report shows US Treasury receipts were down disturbingly and almost all government outlays were up. I personally have had Profit & Loss responsibility on numerous occasions during my career and I would have been apprehensive facing the auditors or board of directors with such a blatant example of mismanagement. Absolutely no cuts in expenses, with falling revenues, all made to marginally appear better than the February report by a single line item called “other.” Executives get fired for such a report but governments just carry on until the inevitable crisis event finally occurs. Then the traditional blame game begins, blame is assigned and belated and poorly formulated policy responses are enacted.
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