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Monday
May182009

Tax Revenues Tanking

This mornings mail bag contains this article penned by David Galland, Managing Editor, The Casey Report which suggests that we are in for a massive dose of inflation and a stunning rise in interest rates.

While everyone else has been focused on the banks’ stress tests and how much government is spending to bail out troubled “too big to fails,” a disturbing trend on the other side of the equation is now emerging: how much (or rather, how little) the U.S. government is receiving in tax revenues.

After combing through the past 25 editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, we created the following chart.

US Gov Receipts Casey.JPG



Here’s what’s going on:

In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.

Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!

When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus -- on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year. 

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper.

Using the government’s own expense projections, the revenue shortfall, even if it doesn’t worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. For reasons we’ve discussed at some length in The Casey Report, those expense projections are likely to be significantly understated.

Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009… in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion “adjustment” alone totaled more than any full-year budget deficit in the nation’s history.


Budget Gaps Casey.JPG


Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

In other words, events are rolling out almost exactly as we have been anticipating. Below, for example, are some useful excerpts from an April 3 article titled “Widening Deficits” by Casey Research CEO Olivier Garret. To quote…

In the midst of the Great Depression, the 1931 federal tax revenues had fallen by 52% from their 1929 highs. While we do not expect anything that dramatic in 2009, it would not be unrealistic to see a 20% to 25% reduction in cash flow from tax collections this tax season. Such a drop would pose significant challenges given that spending commitments are off the charts and climbing.

Later in that same article, Olivier continued, In the absence of sizeable increases in tax revenues, it is quite clear that the lion’s share of the planned sales of Treasuries in 2009 cannot be met by demand from the market. Either the Treasury will have to raise interest rates significantly, or the Fed will need to step in very aggressively to support the planned auctions. Our expectation is that both will happen. Auctions will fail and the Fed will step in. The market will react to more printing by anticipating inflation and demanding higher interest rates. Once the cycle starts, it will be very hard to pull interest rates back.

We continue to stand by our December forecast that the 2009 budget deficit is more likely to widen to levels between $2.5 and $3 trillion rather than the CBO’s $1.8 trillion forecast. We also believe that inflation could start setting in as early as Q3 of 2009 and will accelerate sharply by 2010. Treasury Rates will start climbing and the era of cheap money will end, making it harder for overleveraged consumers, businesses, and governments to service their debt.

Olivier’s forecast of failed auctions and rising interest rates on Treasuries proved more prophetic as a May 7th story from Bloomberg reported:

Treasury 30-year bonds fell the most in four months as investors demanded higher-than-forecasted yields at today’s auction of $14 billion of the securities with the U.S. slated to sell a record amount of debt this year.

“This is a problem,” said Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, one of 16 primary dealers required to bid in Treasury auctions. “The market required a fairly significant discount to buy the bonds.”

Thirty-year bonds have lost investors 20.9 percent this year, Merrill Lynch & Co. indexes show, as the Treasury increases securities sales to help fund a swelling budget deficit. Yields climbed to a six-month high today as the auction drew a yield of 4.288 percent, higher than the 4.192 percent average forecast in a Bloomberg News survey of seven primary dealers. Demand was below average, judging by total bids.

The benchmark 30-year bond yield climbed 23 basis points, or 0.23 percentage points, the most since Jan. 5, to 4.316 percent, at 5:25 p.m. in New York, according to BGCantor Market data. It was the highest yield since Nov. 14. The 3.5 percent security due in February 2039 dropped 3 15/32, or $34.69 per $1,000 face amount, to 86 3/8.

The 10-year note yield increased 16 basis points to 3.345 percent, the highest since Nov. 24.

Two-year notes yielded 1 percent for the first time since March 18, while the rate on the three-month Treasury bill was 0.18 percent.

So, what does all this mean?

As per above, the rock-and-the-hard-place scenario we have been predicting is unfolding before our eyes. At this point, other than sharply changing course and letting the free market cope with the crisis through a brutal “survival of the fittest” scenario, the government is left with no other option than to accelerate its buying up of its own debt. 

Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for the stunning rise in interest rates we are now positioning ourselves for in The Casey Report (and, you can too… learn more).

Have a sparkling day.

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Reader Comments (9)

According to the Bard, "the evil that men do lives after them, the good is oft interred with their bones".

We are forced to ponder what legacy this new Administration will leave behind after the herd realizes what is happening, and too late to change course.

John

May 19, 2009 | Unregistered CommenterJohn Ell

I understand that inflation is here or coming, but is the fed printing this actual money or is it also creating digital money as well? I kind of imagine that these infusions into banks are only on spreadsheets of the banks and not real hard cash.

Is it crazy to think that the inlation might be subdued due to the real money not flowing to peoples hands?

Does anyone think that the Fed can actually pull this off or is it a hopeless case? I am so confused!

So is all this money that is being given to the banks being used just to pay payroll and the rent and keep the lights on? Its just plain crazy!!

I have read about inflation/deflation/disinflation and I can tell you that it seems like every side makes it points, but which way is this thing really going to go. Am I not going to be able to feed myself eventually??? If inflation really is the way, how bad and how will the FED fight it, will they fight it or can they??

???????

May 19, 2009 | Unregistered Commenterchris

Oh come on! No need to worry its all just a way of achieving a one world currency by making the existing system look broken. Just buy gold now (its going to go up real soon) and the take up a nice relaxing past-time such as gold dredging or gold detecting. And of course gardening ie grow your own veges because for a period of time you may need a barrow of cash to buy a potato. What a golden age we have coming!

May 19, 2009 | Unregistered CommenterLachlan

"We are spending more money than we have ever spent before, and it does not work. After eight years we have just as much unemployment as when we started, and an enormous debt to boot". - U.S. Treasury Secretary Henry Morgenthau...May 1939

I think it is time people figured out , stagflation style.

May 19, 2009 | Unregistered CommenterChuck

To know the future, look to the past.

All of this has happened before, but only the very old
were alive at that time.

For the first time in decades the first family planted
a garden at the whitehouse, you might think about that.

May 20, 2009 | Unregistered CommenterEx_MislTech

One big giant Ponzi system that is imploding in slow motion. Freedom Club

May 20, 2009 | Unregistered CommenterPatriot 1776

Chris, don't panic. Trust in God.

Remember the old saying, che sera, sera - what will be, will be. We can't control the wind, but we can adjust the sails.

We have front row seats to observe the coming change in American history and world history, the likes of which no one has ever witnessed before, or will ever see again.

John

May 20, 2009 | Unregistered CommenterJohn Ell

"Trust in God". Well said John. Really the most pertinent point which can be made. Whether people know it or not God supplies everything that people need whether those people are Christian or pagan etc. Gold is not God, in my opinion. Gold is, in my opinion, a wise investment at the present time. As long as we are human we will always be vulnerable to the worries of the world. However, when in God we trust we will receive strength and courage to walk forward into the future no matter how grim it "may" seem. I worry sometimes, but so did the apostles, and Jesus too. Any human who knew they were about to be nailed to a cross would become distressed. And then I remember that there is nothing in this life I can lose that was not given to me in the first place by God (even my life). And so despite his distress Jesus walked straight on forwards to the cross as God had instructed him to do. In faith. And to victory. A victory over fear and doubt...the spirit of this world. What a great example for us all.

May 21, 2009 | Unregistered CommenterLachlan

Thank you, Lachlan, for your comments. We are out of town so I was unable to respond sooner. Perhaps more folks will share those sentiments before it is too late. Remember the old saying, "there are no atheists in fox holes".

I find it an interesting quirk of human nature that many, if not most, individuals will write about almost anything except when it comes to sharing their positive feelings about God.

J

May 27, 2009 | Unregistered CommenterJohn Ell

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