We’ve now have just a little over 30 days until US breaches its debt ceiling.
We would have already done so, except Treasury Secretary Tim Geithner borrowed some $200 billion from emergency funds to buy a few weeks’ time (announcing that he’d be leaving his post before the actual ceiling was breached).
The “solutions” to the debt ceiling discussions range from outright insane ($1 trillion coins) to just staggeringly irresponsible (just get rid of any oversight and grow the debt without restriction).
Let us consider the facts.
The only reason the US is even having these discussions is because we’ve added $1+ trillion in debt to our balance sheet every year since 2008. The reason we were able to get away with this was because Congress hasn’t even implemented a budget since that time. Indeed, the last time a budget was even proposed (by President Obama in that case) it was rejected 97-0.
Let’s say a US family spent all of its savings and income and so began using credit cards to fund its purchases. Then, instead of implementing reforms and a budget, these folks decide to abandon any kind of tracking of their expenses and start spending even more. Eventually this family would begin to stop paying its bills.
What would you tell these folks if their proposed solution to this situation was to stop opening their mail?
At the core of this entire situation is a total lack of financial discipline. Indeed, at this point, the only thing the political class in the developed world seems to pay attention to is the bond markets: only when their bonds collapse and interest rates spike is there any sense of urgency to do anything (with massive debt loads, any increase in interest rates means hundreds of billions of dollars in more interest expenses).
On that note, the US 30-year Treasury appears to just have taken out its trendline:
Bear in mind, the US Federal Reserve has been the primary buyer of US debt. So if the US bond market begins to collapse at a time when the Fed is already buying this much, there isn’t a whole lot the Fed can do to fix the situation (other than just buy more… which inevitably leads to a debt implosion).
This situation has the potential to get very ugly. Remember the impact the failed debt ceiling talks had on the markets in July 2011?
At that time, the only thing that pulled the market back from the edge was the Fed’s announcement of QE 2. But the Fed has already just announced both QE 3 and QE 4. So this option won’t be around to fix the fallout if the US breaches its debt ceiling again now.
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Phoenix Capital Research