Tags: Pierpont | US | Borrow | Economy

Pierpont Economist: US Must Borrow More as Economy Slows

Tuesday, 05 Nov 2013 05:35 PM

The U.S. will need to borrow more as the smallest budget deficit in five years starts to expand amid slowing economic growth and the expiration of short-term budget measures, said Stephen Stanley at Pierpont Securities LLC.

“Short of a dramatic recovery or substantive policy reform — neither of which is expected — the Treasury will have to borrow more,” said Stanley, chief economist for the Stamford, Connecticut-based firm. “Most of the factors that have led to the dramatic improvement in the deficit have been the result of temporary policy changes that are losing their effect right as the economic outlook has dimmed.”

A lack of long-term spending cuts and an economy growing at a sub-par pace mean the U.S. will have to ramp up borrowing within the next two years, Stanley said. This comes amid the largest spending decline since the Eisenhower administration, the Treasury Department said on Oct. 30. Lower outlays resulted partly from the across-the-board cuts, known as sequestration, that kicked in March.

U.S. expenditures exceeded receipts by $680.3 billion in the 12 months ended Sept. 30, the narrowest gap since 2008, compared with a $1.09 trillion shortfall in fiscal 2012, the Treasury said Oct. 30.

Department revenues have been bolstered by record profits from Fannie Mae And Freddie Mac, which nearly collapsed during the 2008 credit crisis. As the housing market rebounds from the worst recession since the 1930s, the companies are required to send almost all of those profits back to the Treasury. So far, they’ve remitted about $146 billion.

Automatic Reductions

A bipartisan congressional committee has until Dec. 13 to come up with a budget-cutting plan or another round of automatic reductions will kick in in January.

Treasury Secretary Jacob J. Lew last month urged lawmakers to “replace the corrosive across-the-board cuts known as sequestration with fair and balanced deficit reduction policies.”

“In my view, there is little chance of a big deficit reduction deal, the so-called Grand Bargain,” Stanley said. “While there is probably a small deal that could be hashed out under the right circumstances, the bitterness of the most recent episode is not likely to present those circumstances.”

The U.S. will announce tomorrow the amount it will sell in three-, 10- and 30-year debt on three consecutive days starting Nov. 12. The Treasury said Monday that it will borrow about 13 percent more this quarter than it projected three months ago to boost the nation’s cash balance on Dec. 31.

Slower Growth

Issuance of net marketable debt will be $266 billion in the October-to-December period, compared with $235 billion initially forecast on July 29, the department said in Washington. At the end of December, the Treasury will have $140 billion in cash, versus $80 billion projected before.

The 16-day partial government shutdown in October that resulted from Washington budget gridlock led economists to lower their estimates for U.S. fourth-quarter economic growth to a 2 percent annualized rate from a 2.4 percent pace before, according to a Bloomberg survey released Nov. 1.

“The Treasury prides itself on being regular and predictable,” said Stanley. “But at the end of the day, the biggest concern is, do we get to the point where the U.S. loses the ability to borrow at such low rates?”

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The U.S. will need to borrow more as the smallest budget deficit in five years starts to expand amid slowing economic growth and the expiration of short-term budget measures, said Stephen Stanley at Pierpont Securities LLC.
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Tuesday, 05 Nov 2013 05:35 PM
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