Goldman Fears "Rapid Downturn In Economic Activity" If Debt Limit Breached

Tyler Durden's picture

The federal government has been partially shut down for 4 days, and it appears likely that the situation could continue for a while longer. As the shutdown continues, the political focus has begun to shift to the next deadline: the Treasury expects to exhaust its borrowing capacity by October 17. Goldman expects the Treasury’s cash balance to be depleted no later than October 31 and possibly quite a bit sooner.

After October 17, the Treasury can keep conducting auctions to roll over maturing securities, but it cannot increase outstanding debt. If the debt limit is not raised before the Treasury depletes its cash balance, Goldman fears it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. They estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized).  

The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly.

Via Goldman Sachs,

Two Deadlines Lead to Uncertainty

Unless Congress raises the debt limit, Treasury will no longer be able to issue debt from October 17, and it will deplete its cash by the end of October if not before (Exhibit 1). Unfortunately, the deadline for action in this instance has become less clear than in previous debt limit debates, in part because much of the commentary on the debt limit has conflated two different deadlines.

The first deadline is when the Treasury will exhaust its borrowing authority. The Treasury announced in September that it expects this to occur on October 17, in line with the projection the Treasury released a month ago. Since this projection is determined mainly by Treasury issuance expectations and flows in trust funds, rather than on day to day fluctuations in cash flows, there is little reason to second-guess Treasury’s estimate.

By contrast, the Treasury does not project when it will deplete its cash balance, though many external organizations do. Since the Treasury usually aims to run a cash balance large enough to cover unexpected payment needs or a revenue shortfall, the Treasury expects to have $30bn on hand the day it exhausts its borrowing capacity. The Treasury views this $30bn as the minimum prudent balance in light of the significant uncertainty in daily cash flows, though there have been a few instances (unrelated to the debt limit) in which the cash balance has dipped below $15bn. Most external projections of the debt limit deadline focus on when this cash is depleted. Our own estimate implies that the Treasury could conceivably continue to make its scheduled payments until the end of October.

However, the Treasury’s cash balance is likely to be so low after about October 25 that, depending on revenue fluctuations, the cash balance could be depleted on any day. At that point, it is possible that the Treasury would need to cease making payments in order to conserve the little remaining cash they would still have on hand.

The partial shutdown of the federal government is unlikely to shift the date at which the Treasury depletes its cash by more than a couple of days in our view. The main effect of the shutdown would be to eliminate Federal employee compensation for non-exempted workers, which should amount to $400 million per day on average in reduced spending, or about $5 billion in reduced spending if it lasts until the October 17 deadline. It is possible that spending in other areas of the budget could slow, lowering spending slightly further.

However, it is very unlikely that the Treasury would see a large enough spending reduction to extend the date at which it depletes its final cash balance by more than a couple days. A number of large payments totaling around $60bn are due November 1, and it appears very unlikely that the Treasury would be able to make all of the payments scheduled that day absent an increase in the debt limit, regardless of the exact effect of the shutdown.

While we believe that congressional leaders take the October 17 deadline seriously, there is nevertheless a fair chance that Congress might not pass legislation to deal with the debt limit until after that date, because of the expectation that the $30bn cash balance the Treasury projects could be used to meet obligations for several more days. While this is probably true, if Congress does not increase the debt limit by the October 17 deadline, we would expect markets to interpret this as an increased risk of missed payments, potentially resulting in much more disorderly market activity than we expect to occur prior to the deadline.

Growth, Not Treasuries, Ultimately at Risk in a Debt Limit Mishap

Failure to raise the debt limit would eventually lead to a sharp reduction in spending and could result in a rapid downturn in near-term economic activity. A very short delay past the October deadline—for instance, a few days—could delay the payment of some obligations already incurred and would create instability in the financial markets. As noted in prior research, this uncertainty alone could weigh on growth.

But a long delay - for example, several weeks - would likely result in a government shutdown much broader than the one that started October 1. In the current shutdown, there is ample cash available to pay for government activities, but the administration has lost its authority to conduct "non-essential" discretionary programs which make up about 15% of the federal budget. By contrast, if the debt limit were not increased, after late October the administration would still have authority to make most of its scheduled payments, but would not have enough cash available to do so.

Using our cash flow projections as a guide, we estimate that the revenues the Treasury will receive in the month following the October 17 deadline would equal only about 65% of spending going out, implying a far greater fiscal pullback than will occur as a result of the ongoing shutdown. In essence, a prolonged delay would force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. (The deficit has significant seasonal fluctuations and CY Q4 is normally a higher-deficit period, offset by lower deficits or surpluses in other periods, particularly CY Q2.)

We estimate that the minimum pullback in spending that would be required to remain under the debt limit for one month without an increase would be equivalent to 1.7% of GDP (annualized).14 However, if the Treasury decided to set aside interest payments and make other payments in arrears, we estimate it would result in a pullback in primary (i.e., noninterest) outlays of 4.2% of GDP (annualized). In both cases, the effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly.


Still think it's risible to consider a US in recession? ... think again.

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surf0766's picture

Good.  Flush the system of all ineffeciencies.

Fredo Corleone's picture

So - Goldman is getting sweaty palms ?

A good sign indeed. The printing/spending binge may be broken yet.

CrashisOptimistic's picture

All those willing to trade a year of -4% GDP growth for a $0 deficit, raise your hands.


max2205's picture

Sure, right ....check back if it happens

LetThemEatRand's picture

I'll take -20% GDP growth if it puts the fucking mega banks out of business.  The next decade would see massive (real) growth.

NoDebt's picture

I'll take -20% GDP growth if it saves my children from having to pay a huge cost for the current generations' borrowing insanity.  Put the pain where it belongs.

This is one where I really can say, in all seriousness, this IS for the children.

1000 splendid suns's picture

Help me out here - the Fed monetizes ~100% of the debt, and they don't answer to the congress. So how is this not just a fricken side show?
As to the 4.2% GDP, they'll just find a way to fudge the numbers like they have for the last 10-15 years of true downturn.
Hope everyone has their gas tanks full and their pantries filled with spaghettios before the Snap cards don't reload.

Paveway IV's picture

Who cares? If Goldman didn't want it to happen, then I'ld eat my own frickin' liver if that would somehow ensure that it happens.

Like smarter people point out though - it's all meaningless. Nobody is going to out-smart TPTB. They're not even playing the same game.

Manthong's picture

Yeah, like I am really going to stop spending all day at the bar just because of some haggle down in DC.

MisterMousePotato's picture

You know what the saddest thing about all this is?

The Republicans want a one-year delay in enforcement of the individual mandate in OvomitCare in exchange for raising the debt ceiling.

In other words, they want to delay the harm, the damage, the destruction wrought by this Democrat legislation until after the elections.

Why? Why the fuck why?

To gain what?

Raise the debt ceiling?

Now how is that gonna help us?

geewhiz's picture has minus GDP since 2005 and -2% now.

Papasmurf's picture

They've hedged both posibilities.  To learn what will happen, find out what they recommend to their muppets.  I meant clients.

Vampyroteuthis infernalis's picture

Like we are going to believe the squid all of a suddenly?

NoDebt's picture

Schemes inside of schemes inside of schemes.

kill switch's picture

Goldman sucks and is a misdirection tool!!!!!!!!!!!!!!!!!!!!!!!!

knukles's picture


Quit listening to these people... it's all horseshit
Excuse me, but now it gets serious....

Yellowhoard's picture

The sooner this bubble gets pricked the lesser the pain.

NoDebt's picture

...said the guy who just time-travelled in from 1999.

Just kidding.  But I've been saying that for a LONG time.  Nobody's listened to me yet.

Pure Evil's picture

I can only imagine Barry using that line on Reggie Love.


"The sooner this cherry gets pricked the lesser the pain.....mmmmhhhhhffff.......ssshhhh.....don't worry Reggie, I'll finish it off with a reach around."

ShrNfr's picture

The debt grows at a rate of 4.2% of the GDP. The population of the US grows at 1%. Those people produce the GDP. Anybody else see the problem??

LetThemEatRand's picture

"Goldman Fears "Rapid Downturn In Free Money To Goldman" If Debt Limit Breached".  Fixed it.

NoDebt's picture

Both sides are really leaning hard on the rhetoric with Boehner's most recent comments.

Reminds me of that scene in "V for Vengenace" with the supreme leader screaming "We've got to remind these people how much they need us" at his minions through the gigantic video screen.


A Lunatic's picture

The Treasury is too big to fail. No worries.......

Ineverslice's picture


Dear Goldman,


hfbamafan's picture

Unless I missed something, BAC, and GS, are the only 2 banks to issue a statement on the effects of a default. Well that only leaves 2 more left.


On topic, this is starting to sound a lot like propaganda trying to scare the S^&* out of the American people.

I guess we will wait a day or so until JPM issues an opinion. 

If we breach the debt limit, the FED will just give Warren Buffet a call for a bridge loan. He trusts T-Bonds so much that is where he puts all his spare cash, why not front his friend.

knukles's picture

Starting to sound like propaganda, did you say?
When the fuck's it not been propaganda?


Like the BBG article about what's the poor Fed to do without BLS stastics?
Like closing every fucking national park, etc., to make it seem like it hurts bad.
Like oh, neverthefuckmindanymore....

hfbamafan's picture

Sorry should have made my post more precise.


I was alluding to all of the big banks coming out with this dribble to scare congress, and the american people.

lakecity55's picture

DAR Revolts!

(PA)--Valley Forged, VA--President Sheik ordered the local chapter of the Daughters of the American Revolution closed today. The DAR facilities, however, are Private. Almost a dozen heavily-armed SWAT Rangers were beaten soundly and run off the property as the spry oldsters easily overwhelmed the fat, equipment encumbered SWAT team. Two officers suffered minor butt cheek wounds from shotgun fire, while three were maced. The DAR are now holed up in their facility while dozens of armed drones circle above their heads.

socalbeach's picture

Future collector's item.

Check from the Treasury not honored due to Non-sufficient funds (NSF).

rsnoble's picture

Deliveries that used to take several days to get to my shop are now taking on average 2 days here as of late.

Papasmurf's picture

Soon it will take 48 hours!

seabiscuit's picture

If I understand the situation correctly:


if nothing is done with regard to the {arbitrary and always rising} debt limit, bad shit happens. GDP goes down not unlike a CNBC Quicky on Warren Buffett's schlong.


If we continue increasing the {all accelerator and no brakes} spending, good shit happens. GDP goes up and unicorns keep shitting skittles, and the punchbowl stays full for Vichy. meh, what's the worst that could happen?





A Lunatic's picture

According to Jack Lew, if we do not raise the debt ceiling, the worst will happen. Not only that but worser and possibly even worserest things will happen, although he failed to go into particulars when defining just what those terms might mean other than alluding to their catastrophic nature......

knukles's picture

Eczema, goiter, open running sores, puss and blood weeping shankers, must reusing dirty condoms, homeless subsiding on the spit of the rich, Hollywood turning Republican, Moloch eating the poor's children, ACA servers being overloaded, people becoming paraniod.....

CrimsonAvenger's picture

Worse than all of those combined: We'll have to listen to Jack Fucking Lew a whole lot more than we otherwise would.

monad's picture

Same old same old then. fwd!

lakecity55's picture

The Sheik:

The debt ceiling was not raised! I am declaring Martial Law!

EBT and SS and any USG payments to serfs will cease! I will be cutting back 1 hole of golf per month!

FSA fighters imported from Syria will show you how to prepare "food."

We must have a new government to deal with the emergency!

Forward, Soviet!

Keyser's picture

Yeah, much like the sequester was supposed to be the end of the world. 


Dadburnitpa's picture

This "unbiased analysis" is brought to you by the douche bags who benefit the most from government largess.

Australian Economist's picture

Why dont the government just not run a deficit?


Then they don't need to raise the debt celing

SillySalesmanQuestion's picture

WARNING! WARNING! Danger Will Robinson and Dr. Smith...hold tight and do not be sucked into the vortex created by the black hole of the Squid...

notadouche's picture

I would've thought they would fear rapid downturn based on the facts well before debt ceiling, government shutdown etc...

orangegeek's picture

This is playing out like a cheezy "B" movie.


......Robin, to the batmobile.....Joker is getting away....

Keyser's picture
"Rapid Downturn In Economic Activity" = Collapse of the US Empire
Ned Zeppelin's picture

Far from it, more like the first step in a 12 step recovery program. The real economy would not stop or be harmed, only the Wall Street economy. That's why Jamie, Lloyd, and the rest of the TBTF douchebag CEOs paid Obama a visit the other week.

Vooter's picture

I gotta say, it's absolutely hilarious to watch the government, the banks, and the media desperately try to talk their way around the problem without actually acknowledging the existence of the problem...

thismarketisrigged's picture

fuck u goldman. u guys should not even be in exsistence anymore. keep ur mouths fucking shut u fuckers.


hopefully this next crisis wipes u guys out for good.

lolmao500's picture

Goldman fears it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling.

Ain't that a bitch uh? Not living above your means... doing like the peons... how sad...