Skepticism about Treasury claims of debt paydown

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Betsi Fores The Daily Caller News Foundation
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The Department of the Treasury announced yesterday that it will begin paying down the debt for the first time in six years this quarter. But experts say the plan is less than meets the eye.

The Treasury expects to pay down $35 billion between April and June, up from an earlier projected borrowing amount of $103 billion. This is the first quarter money has been allocated to pay down on the debt since the April to June quarter of 2007.

The Department points to policy changes that provided the Treasury with more revenue this quarter. The changes include the expiration of the payroll tax holiday, sequestration of federal spending, and reported profits from the housing loan guarantors Fannie Mae and Freddie Mac.

But according to some economists, this announcement will have little or no effect on the long term budget woes facing the country.

“It’s hard for me to get excited,” former director of the Congressional Budget Office and president of the American Action Forum Douglas Holtz-Eakin told The Daily Caller News Foundation.

“What you’d like to have is a budget that balances on average,” Holtz-Eakin lamented. “What we have instead in a budget that bleeds red ink on average. There isn’t a month or two that changes that.”

Others still point to the announcement as a sign the economy is moving in the right direction.

The change “is emblematic of the turn in budget finances from horrible, to grim, on their way to steadily better,” Eric Green, global head of rates and foreign-exchange research at TD Securities, told MarketWatch.

The Treasury still expects to add to the debt during the last quarter of the year — an estimated $223 billion.

Mark Calabria of the Cato Institute said that this announcement was nothing to be surprised about.

“We all expected that revenues would go up at some point..certainly the sequestration is having some effect,” Calabria told TheDC News Foundation.

“I would certainly couch this in what Treasury puts out as an estimate. The only thing you can say for certain about estimates is that they will exactly be wrong, one way or another,” Calabria added.

Details of the revenue surplus will be announced Wednesday.

Calabria suggested that of the $35 billion the Treasury estimates it will pay down, as much as $10 billion might come from the “momentary period where Fannie [Mae] and Freddie [Mac] were profitable.”

The mortgage giants, which had been ostensibly private government-sponsored enterprises, were placed into a conservatorship in 2008, a move that then-Treasury Secretary Henry Paulsen said would allow Treasury to “commit taxpayer money to the GSEs”  It is unclear how much public money went into life support for the GSEs, beyond the initial commitment of $200 million. Both Fannie and Freddie continued to lose money through the recovery period, at rates often exceeding $10 billion per quarter each.

Although politicians on both sides of the aisle have discussed winding down the GSEs, the percentage of mortgages owned or guaranteed by Fannie and Freddie has continued to increase. The GSEs’ apparent profit is largely a function of a slowdown in mortgage foreclosures — a trend that RealtyTrac estimates may already have come to an end, with this year seeing a 12 percent increase over 2012 in the “shadow inventory” of loans that are almost certainly headed for foreclosure.

Despite the shaky foundations of the Treasury’s claim, the deficit paydown was treated as positive. Upon news of the payback, U.S. bond yields jumped, 0.5 percent for 10-year notes, and a whole point for 30-year notes.

The Bipartisan Policy Center announced last week that the estimated date for the U.S. to reach the debt ceiling would be later that originally expected, possibly as far back as mid-to-late September. It had previously been estimated to be reached by the end of August.

“Treasury Secretary Jacob Lew said last week he could not forecast the exact date when Congress has to raise the ceiling to avoid a default,” MarketWatch notes.

Republicans have gravitated toward the debt ceiling  issue, hoping to force spending cuts in exchange for raising the debt ceiling.

The CBO’s estimated addition to the debt for fiscal year 2013 remains $850 billion. Over the next ten years, $7 trillion is expected to be added to the debt.

“A month of tax windfalls just doesn’t change that,” Holtz-Eakin said.

The U.S. debt is currently nearing $17 trillion, with the debt per person above $53,000.

One can’t look too long-term into this annoucement, Calabria said.

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Content created by The Daily Caller News Foundation is available without charge to any eligible news publisher that can provide a large audience. For licensing opportunities of our original content, please contact licensing@dailycallernewsfoundation.org.