The Debt Ceiling Is Back
While many may not recall that the US has been without an official debt ceiling for the past three months, or even that it has a debt target ceiling, the bonus period agreed upon in January to let the nation rake up some $400 billion in addition debt in the past few months, officially runs out tomorrow, May 19, when the debt limit will be restored to its previous level plus the debt that was incurred in the interim, which means around $16.735 trillion in total debt as of yesterday, plus the amount incurred today, excluding the debt not subject to the cap which is about $30 billion. And since no grand bargain is forthcoming in a world in which official governance is now almost universally in the hands of the world's central bankers and out of the hands of the theatrical career politicians, it means that the next deadline in the endless US debt ceiling saga will be the day when the extraordinary measures to extend the debt ceiling run out.
Such a deadline will likely be hit in just over three months. As the WSJ reports:
Mr. Lew said the Treasury would be able to use the same extraordinary measures that the department deployed during the last debt-ceiling standoff at the start of the year. Those include halting investments in government worker retiree funds and drawing down some accounts.
“Treasury is not able to provide a specific estimate of how long the extraordinary measures will last,” Mr. Lew said.
But because of strong tax receipts and billions of dollars in dividend payments from mortgage giants Fannie Mae and Freddie Mac the U.S. will be able to continue borrowing–and paying all of its bills–until after Labor Day, Mr. Lew said.
September 2 happens to be a rather interesting day: just after the August Jackson Hole symposium where Bernanke will be famously absent, and just before the September FOMC meeting at which the Fed may (or may not) announce it is tapering QE (and when according the current run rate, the S&P should be roughly in the 1800 ballpark).
The song and dance is well-known:
If the Treasury exhausts the extraordinary measures and Congress doesn’t raise the debt limit, the government would be forced to fund its operations with the cash it has on hand, potentially putting Social Security, Medicare, military salaries and other payments at risk.
“The global economic leadership position enjoyed by the United States rests on the confidence of Americans and people around the world that we are a nation that keeps its promises and pays all of its bills, in full and on time,” Mr. Lew said.
Republicans have argued that the Treasury could prioritize to ensure that the government doesn’t default on bond payments. Mr. Lew rejected such an option, saying it would be “unwise, unworkable, unacceptably risky.”
Mr. Lew said that the Obama administration would not negotiate with Congress over the debt ceiling.
The good news is that as a result of an acceleration in government receipts and modest slowdown in spending (however temporary), the immediate cash needs of the government are lower, even though they once again pick up in the last quarter of fiscal 2013 (July-Sept), when marketable borrowings are expected to increase by a fresh $223 billion. The other issue of course is that without the Treasury creating "collateral" (read government debt to fund a deficit) which the Fed can monetize and expand bank reserves in the primary market, the Fed risks to become far too dominant a holder of Treasurys which it would then have to buy from the secondary market, and in the process eliminate even more liquidity from the market. This means that implicitly, Congress will be given a green light to spend away at will, even as Bernanke rages, very theatrically, against the will to generate sound fiscal policy. Bernanke's whole spiel is to create as many billions in excess reserves as he can thus pushing stocks, pardon the "wealth effect" as high as possible, for which he desperately needs a profligate Congress.
Which brings us to the bad news, namely that while many expected a bipartisan compromise on the debt ceiling to be quick and easy, especially in the aftermath of the GOP humiliation from the end of 2012 and early 2013, the events of the past week, which have seen scandal after scandal unfold in the Obama camp, have drastically changed the equation, and suddenly the resurgent GOP may once again play hardball with both the president and the democrats, at just the time when some are starting to throw around the "I" word. And if there is anything that the Obama camp would want to avoid, it is another debt ceiling fiasco at a time when all plates are full as is.
Does that mean a replay of August 2011 is in the cards? It would be oddly symmetric. And yet, that would presuppose that the GOP and the democrats truly have divergent agendas, when in reality both parties are eagerly willing to spend as much as possible in the name of "the people" and both are eager fans of a government that is as big as possible.
And finally, we now live in a day and age when the legislative and the executive are sorry shadows of their former selves, and the only true branch of government, is the monetary (in other words Wall Street). And Wall Street will only let the market drop when it is well and ready, and when it is confident it has transferred enough paper wealth into hard assets, and not a moment sooner.