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US Policy Outlook: Non-Hyperbolic Version

Marc To Market's picture




 

It is widely recognized that the agreement to mitigate the fiscal cliff neither puts the US on a sustainable fiscal path nor lifts much policy uncertainty.  At the same time,  minutes from the latest FOMC meeting showed that several members anticipate ending QE3+ before the end of the year, seemed to cloud the outlook.

Seeking to avoid partisanship of the heated debates, we offer the following overview of the outlook for US policy, free of hyperbole. 

The federal government is already bumping against the debt ceiling.  This is the limit on borrowing that Congress has set, though it has already approved the spending.  The Treasury Department has already indicated that it is resorting to unorthodox measures that can last a few weeks. 

It was under such fight between a Democrat President and Republican-controlled House of Representatives that led to the closure of the government twice in 1995. Some Democrats are encouraging Obama to challenge the constitutionality of the debt ceiling legislation. 

The gist of the argument is that the 14th Amendment (to the Constitution) states that the "validity of the public debt of the US, authorized by law...shall not be questioned."  The claim is that the debt ceiling  raises doubts over the sanctity of US financial obligations.  It is, as one pundit put it, like eating a breakfast at a restaurant and then balking when the bill comes.  Obama has indicated no intention of challenging the validity of the debt ceiling. 

Beginning in the blogosphere seemingly as a joke, the idea that the Treasury Department can take advantage in a loophole to bypass the debt ceiling has captured the imagination of many.  The idea here is that the Treasury Dept is free to create platinum coins of any denomination.  It could "create" a $1 trillion platinum coin and retire the same amount of existing debt.

Despite the yards of commentary devoted to this idea, it is a non-starter for a numerous reasons.  Suffice it is to point to two here.  First, if Obama does not want to challenge the constitutionality of the debt ceiling, he is most unlikely to embrace such a gimmick.  Second, there is simply nowhere near enough platinum.  Reports suggest that only 16 tons of platinum have ever been mined.  Near current prices, $1 trillion would require nearly 18,000 tones of platinum. 

Around the time that the debt ceiling will have to be addressed, the US will face additional pressure to act.  The resolution of the fiscal cliff included delaying the spending cuts until the start of March.   The sequester called for $110 bln in spending cuts, evenly divided between defense and non-defense sectors.  Social Security and Medicaid spending were not included. 

At the end of March, the existing budget appropriation authority expires.  This is the authority Congress grants that allows the government to spend money on anything but essential services.  This is Congress' ultimate power over the executive branch.  It controls the purse strings. 

Separately,  the debt ceiling, the spending cuts, and expiration of the appropriation authority could see a fierce fight, but together, they may make the fiscal cliff negotiations seem like a tea party.

It is ironic that the minutes from the FOMC meeting at which it decided to more than double the size of its outright asset purchases (to $85 bln a month from $40 bln) and adopt macro-economic guidance that suggests interest rates will not be raised in for more than two more years, some observers see signs of an early end QE.  Moreover, the new configuration of the votes on the FOMC, with the annual rotation of regional presidents, gives it a slightly more dovish cast. 

A Reuters survey of primary dealers found that 9 of 16 (that responded) see QE ending by the end of the year (8 say at the end of the 2013, while 1 said at the end of H1).  Six expected QE to carry into 2014 and 1 expects it to continue into H1 16.  The median expects the Fed to buy $540 bln of Treasuries this year, which is $45 bln a month (and there is an additional $40 bln of MBS being bought per month as well). 

It terms of unemployment, 9 of the 16 expected it not to fall below 6.5% until 2015, 6 see it in 2014 and 1 does not see it happening until 2016. 

 

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Tue, 01/08/2013 - 13:35 | 3133295 WhiteNight123129
WhiteNight123129's picture

How about the fact the minutes are trying to paint the fact that treasuries sold off when they initially announced the extension of QE?

If that is the case, you will reversal of language soon, and teh treasuries rally again. The treasuries market will have ~forgotten~ that they reacted negatively initially to the extension of QE on December 12th 2012.

The mayan date was not 12-21-12 but 12-12-12 the day the treasuries sold off when they announced more QE and the beginning of the unraveling!

If soon they revert their language and hte treasuries rally, you have a very smelly desperate attempt to manage expectation about teh treasuries market.

 

Tue, 01/08/2013 - 13:15 | 3133227 11b40
11b40's picture

The debt ceiling will be raised - QE will not end.  There will be a lot of noise.  Inflation in all things basic will continue.  The dollars in your pocket will be worth less by the day.  What else is new?

Ho-hum.

Tue, 01/08/2013 - 12:49 | 3133124 TerminalDebt
TerminalDebt's picture

They will vote to raise the Debt ceiling in return for another fiscal cliff a year from now.

When the fiscal cliff rolls around they will vote to cancel it. 

Carry on, nothing to see here.

 

Tue, 01/08/2013 - 12:43 | 3133108 porcsale
porcsale's picture

How about getting out of Afghanistan? Not the just the troops, the mercenaries you pay too?

Tue, 01/08/2013 - 11:40 | 3132932 Nels
Nels's picture

There isn't enough platinum?  The price of platinum has no more to do with the denomination of the proposed coin than the price of paper has to do with the denomination of a $100 bill.

Tue, 01/08/2013 - 17:36 | 3134181 Marc To Market
Marc To Market's picture

Yes you are right.  The fact that there is not enough platinum in the world to make a $1 trillion coin does not in and of itself mean that it won't or can't be done.    It does seem to show the absurdity of it.  I hope it does not detract from the thrust of the argument.  The President who does not want to challenge the constitutionality of the debt ceiling is not looking for a gimmick to circumvent it.   It is a non-starter.  I might even argue that the absurdity of it will itself violate the 14th amendment because it would call into question the validity of US debt.  Now I know it may be tempting to argue that the magnitude of the deficit and debt has already called the validity of the debt into question.  I would point out that this is not the case as illustrated by 1) cost of insurance against default, e.g., CDS pricing, 2) the low yield--market is still bigger than the Fed, and 3) foreign central banks continue to buy and hold US government bonds and agency debt.  There may be some who would eschew US debt on the grounds that it is bankrupt, but this is not the prevailing perception or opinion.  It is a very small tail.  

Tue, 01/08/2013 - 12:40 | 3133098 s2man
s2man's picture

Yeah, he lost me when I read that.

Honestly, I don't see the big deal about the coin.  What is the difference between minting, printing or bits in a digital ledger?  It all money created out of thin air.

Tue, 01/08/2013 - 13:42 | 3133348 slightlyskeptical
slightlyskeptical's picture

We either have the platinum already...so why isn't it already counted?

 

or

 

We have to buy the platinum...so what would be the point of borrowing more dollars to do this?

 

It is not surprising to see a retarded idea being floated by a bunch of retards (Congress, Treasury)

 

 

Tue, 01/08/2013 - 13:42 | 3133347 slightlyskeptical
slightlyskeptical's picture

We either have the platinum already...so why isn't it already counted?

 

or

 

We have to buy the platinum...so what would be the point of borrowing more dollars to do this?

 

It is not surprising to see a retarded idea being floated by a bunch of retards (Congress, Treasury)

 

 

Tue, 01/08/2013 - 11:37 | 3132914 Snakeeyes
Snakeeyes's picture

Our government spending, deficits and debt are a drag on the economy and getting worse! The growth projections for government takeover are astounding!

http://confoundedinterest.wordpress.com/2013/01/06/pennies-40-ton-trilli...

Tue, 01/08/2013 - 11:37 | 3132911 JohnF
JohnF's picture

Sorry, your initial departure point is in error.

 

There is no US policy that is not hyperbole. Hence a non-hyperbolic version of same would be an empty page.

Tue, 01/08/2013 - 10:28 | 3132627 DavosSherman
DavosSherman's picture

BK is BK.

Do NOT follow this link or you will be banned from the site!