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.

Here’s what’s going on:

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.

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).

Source:  Tax Revenues Tanking

One of the ominous signs that sends me running to the safety of the closet under the stairs and slamming the door shut, where I hide in the dark sobbing and wailing about the inflationary horror that is descending upon us, is contained in the Bloomberg.com headline, “Auction-Rate Collapse Costs Taxpayers $1.65 Billion”.

This looks like bad news for underwriters of auction-rate bonds, whatever in the hell they are, as evidenced by Bloomberg reporting that “By mid-February, Citigroup Inc., the largest underwriter of auction-rate bonds, held $11 billion of them, up from $8.1 billion at the end of 2007.”

As a result, the bank’s “investment professionals” were able to report “a $5.1 billion loss for the quarter ended March 31.”

Even worse, “Thousands of auctions failed, forcing issuers such as the Port Authority of New York & New Jersey to pay interest rates as high as 20 percent. The investors were left with securities they couldn’t sell.”

And if you want a quick course in “determination of market value”, plug the phrase “securities they couldn’t sell” into the famous supply/demand dynamic and see what happens to the price of the securities.

But this is not about any of that fundamental stuff or how prices are falling or how losses are being booked or how tax revenues to governments are falling, but about how I laughed and spilled coffee into my lap when the article said, “Holders with no immediate need to unload their auction debt have benefited from the rise in yields.” What? Hahahaha!

Naturally, I jump up and say, “This embarrassing wet stain on the front of my pants notwithstanding, you are wrong! Hahaha! You Bloomberg guys have made a mistake, and yet when you tell people that you work for the famous Bloomberg, everybody goes ‘Oooh!’ and ‘Ahhh!’ and you get a table right away, but when I say that I work for Mogambo Inter-Galactic News Service, they all go ‘What? Who? Go away, irritating little man!’, and I have to go around to the back door of the restaurant and eat in the alley, mostly with dogs like in the movie Lady and the Tramp, which brings up the point that, in real life, those dogs are a lot uglier and meaner, and for some reason you always end up with spaghetti sauce and greasy crap all over your clothes!”

Instead of applauding and saying, “Well, said, Mogambo!” or, “Hooray for The Mogambo!”, they all ignored me, like they ignore me whenever I go to the bank and I have to stand in line, and while I am there I helpfully try to educate all the other people in line about what idiots they are for trusting this bank, or any bank, because all bankers all greedy, crooked, lying, thieving little rats who are part of the Federal Reserve System that is stealing us blind and ruining our economy with their stupid, and wrong, constant-Keynesian econometric theory crap.

But I seem to have strayed from the subject because I enjoy insulting banks and bankers (which I will gratuitously note sounds like “banks and wankers”, which is so much more descriptive), in that the point is that an increase in a bond’s yield means, mathematically, a decrease in the bond’s market value, as the two move inversely to each other.

So lower prices for bonds is only good if you are buying them, because if you are, indeed, holding them, you will not only suffer a paper capital loss as you helplessly watch the prices of the securities go down as interest rates go up, but you will also suffer the humiliation and career-ending poor performance of investing your money at a yield lower than the guys who bought later than you! Hahahaha! Nice job, investment professionals!

And, in the worst-case scenario, if the holders had margined the purchase of the bonds (putting up a small amount of capital and borrowing the rest), then whoever is so unlucky as to have these “investment professionals” managing their money are Really Getting Screwed (RGS); locking in a low rate, suffering a capital loss and having to pay more money to meet the margin call, too! Hahahaha!

But maybe bondholders are so used to being screwed out of buying power that they don’t even notice anymore. Or they are all taking drugs and don’t realize that they are being screwed out of buying power. Or they are masochists who enjoyed being screwed out of buying power. Or they are, as I have said so many times, just childishly-trusting morons who are so busy trying to raise a family in such a wildly inflationary environment that they don’t notice, but will one day wish they had.

Or maybe they are just stupid, as these are probably the same guys who are buying the stocks of the Dow Jones Industrial Average, which is now sporting the eye-popping, totally unbelievable, totally unprecedented price-to-earnings ratio of 87, which shows real stupidity! Hahahaha!

Now you see the mistake of letting the SAT scores of America’s high school graduates fall. And they are fat, too, so they tell me. Fat and stupid. How wonderful for us.

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Source: Screwed Out of Buying Power

Trouble is, businesses aren’t playing ball. No-one (including the Government, it seems) knows exactly what form the new tax rules on foreign earnings will take. But not all businesses are prepared to wait and find out.

Pharmaceutical group Shire has already relocated to Ireland; publisher United Business Media has followed them. Both WPP and AstraZeneca have got the suitcase out of the loft, and could be packing it come the summer.

It’s got Chancellor Eyebrows in a tizz

“Crumbs!” he’s said to himself. “We can’t have all these businesses evacuating the UK. Then we’ll get no tax from them at all!”

So yesterday, Darling dashed off to the City to try to repair the damage. He announced he would be inviting multinationals to join a working group that will look at the “long term challenges” facing the UK tax systems.

“We need to anticipate a growing problem for all governments — how to protect revenues in an increasingly global marketplace…while promoting the competitiveness of our businesses,” he said.

As yet we don’t know who will be in this working group, what it will say, or what the final proposals are going to be. So uncertainty remains king — not a great scenario for businesses trying to make plans.

What is clear is that the Government is in reverse gear again. It doesn’t really have a choice, though. This was a bad idea to start with, and it’s also been badly handled.

Recommended

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This is the final invitation you’ll receive to rake in £19,500 – £48,000+ a year TAX FREE. Seriously, you’ll only need 20 minutes a day, an Internet connection… and the desire to dip your sticky fingers into a multi-billion pound honey pot. But you WILL have to act quickly!

On 30th April 2008 the doors will slam forever: this is your last chance to swipe sums between £95 and £3,880 in as little as 8 days!

If Britain does have a recession, how deep it will be and how long it will last is dependent on how robust our private sector is. Because we’ll need the private sector to drag us out of it.

A wrong move on the tax regime could have dire implications for more than just the Treasury.

Metro newspaper in house price scare story shocker

Another alarmist housing story on the front of this morning’s Metro. “House prices ‘may fall 30%” it blares.

The quote was from Professor David Blanchflower, a member of the Bank of England’s Monetary Policy Committee. But, as is often the case with these things, the devil is in the detail.

The story itself quotes Prof. Blanchflower as saying “I am not suggesting that such a drop will necessarily occur, but it may.”

So let’s take this opportunity to restate the Fleet Street Daily position on house prices. To put it bluntly, they’re too high. As the Metro story reports, the average house costs seven times the average salary. Many lenders are now simply unwilling to lend on that kind of multiple — especially with the economy looking wobbly.

House prices rose too far too fast, and now we’re seeing a correction. Any attempts to prop up the housing market will only delay the inevitable.

Incisive analysis from Brown and King

Both Gordon Brown and Bank of England Governor Mervyn King have been having a pop at the banking sector. King attacked the City’s bonus culture yesterday, while this morning Brown said the banks have taken too much risk.

So… the banking sector had a hand in creating the credit crunch. Give me strength.

One man enjoying the spectacle of Brown’s response to the credit crunch is Tom Bulford, our resident small-caps expert.

“Have you noticed,” he says, “that we don’t have ‘the threat of a recession’ or even ‘a serious financial crisis’? What we have, according to Brown, Darling and the whole chorus of government ministers is ‘a-financial-crisis-emanating-in-America.’”

Tom reckons it’s that old stand-by, ‘blame the foreigners’.

“Never mind that both the USA and the UK have been attending the same debt-fuelled binge for the last decade. Just because the USA may have got its hang-over a few weeks earlier, doesn’t mean we’ve been partying any less hard!”

BG beats profit forecasts — and hits the acquisition trail

BG Group yesterday announced profits of £767 million for the first quarter, compared with £448 million the year previously. Profits beat forecasts by £92 million.

Now BG has launched a $12.9 billion bid for Australian utilities firm Origin.

“There are no guarantees this is a done deal,” says our research director Theo Casey. “The offer represents a 40% premium on Origin’s current share price, but they’ve already rebuffed more generous offers. But it’s a sensible move by BG, using retained earnings to bid for a gas supplier. If they’re successful, this will make them a more balanced energy group.”

Manraaj says: “It’s NOT time for bed!”

“Boing!”

This was Manraaj’s rather cryptic contribution when I called on him at this morning’s meeting. For a moment I thought he’d turned into Zebedee from the Magic Roundabout. But then he carried on:

“I said Asia was due a bounce. Well, it started last week, and it’s carried right on through! Check it out!”

He proudly showed us the chart of China’s Shanghai A-Share Index.

“Up 12.7% in a week!” said Manraaj. “And it’s not just China: India’s Sensex is up… the tide has turned in Asia my friends! Pow!”

Then he stopped to catch his breath. Then he carried on:

“Just look at how fast Asian economies are growing. The falls we saw were way overblown — because of sentiment.”

Manraaj is adamant that sentiment has turned, and this week’s events seem to prove it. Now, he says, it’s time to get back into the market…

Until tomorrow,

Ben Traynor

Editor