If the US defaults, short-term Treasuries, the most traded and liquid securities in the world and which often act as collateral for loans to banks and central banks, would lose their cash equivalence. This would immediately boost interest rates demanded by lenders while some lenders would refuse such collateral outright. Worse, as short-term funding is used in so many areas of the economy, the rise in rates would be pervasive.
Tag Archives: Debt Ceiling
Debt Ceiling Catastrophe
The government shutdown, if short, will mildly depress Q4 GDP growth. The same can’t be said for failing to raise the debt ceiling. The government currently runs a $640 billion deficit/year, 4% of GDP, while GDP growth is 2%. If the debt ceiling isn’t raised, the budget must be balanced, thus federal spending would drop by $640 billion/year causing a recession. Worse, there wouldn’t be mitigating fiscal or monetary policy.
Hazardous Headwinds
While the economy is improving, it’s now facing huge headwinds. They include the need for a Continuing Resolution, hitting the debt ceiling, Syria and its impact on oil prices, who will be the next Chairman of the Federal Reserve, the start date of tapering, fear about whether Abenomics will work in Japan, and concerns about US interest rate hikes reverberating across European peripheral nations and emerging-markets. Expect increased short-term volatility.
Congressional Cowards
Only by pushing off all hard decisions was Congress able to prevent us from going over the fiscal cliff. Now we face Debt Ceiling Battle II which must be resolved by March, a fight over annual spending cuts of $100 billion which after being postponed now commence in March, and a government budget that expires in, yup, March! Based on what we’ve seen, the next few months will be terrifying.
Cliff-Hanger
Washington will not solve the Fiscal Cliff during the lame duck session of Congress. Rather, they’ll pass a stop-gap measure raising the debt ceiling and more importantly giving themselves more time to pass revenue-positive tax reform, consisting of broadening the tax base and lowering marginal tax rates. As now structured the Cliff mixes about $4 in tax hikes for each $1 in spending cuts; minimally, it must be balanced.
Debate’s Effect on Sentiment
The University of Michigan consumer sentiment index fell to 54.9 (the lowest level since the recession of ‘81)! This reading is, I think, a result of the corrosive debt ceiling debate; not due to chronic problems like high unemployment and the poor economy. If I am right, the index will largely bounce back next month to the anemic levels we have been enjoying for quite some time; between 60 and 70.
Debt Ceiling Debacle
Debt Ceiling Debacle: In the foreign exchange (FX) market commodity-sensitive Australian and New Zealand dollars have hit record highs. Gold is also galloping upwards. There is also a strong desire to hold super safe Swiss Francs. Banks and money market funds are also rapidly boosting liquidity (hurting equity prices). All this is being done by investors to protect themselves should the debt ceiling not be raised.
Debt Ceiling Decisions
The Congress will raise the debt ceiling! There have been 6 Biden Summit meetings (hosted by VP Biden and attended by 3 key players from each party) in the past 6 weeks but 3 are scheduled for this week, the heated rhetoric is gone and this weekend Obama and Speaker Boehner will play golf and presumably make the tough decisions. Expect this to be resolved by the end of June.
Courting Debt Ceiling Disaster
During the housing bust banks held mortgage debt they thought was safe. It wasn’t. In the crunch, they got scared and froze; so did the economy. If Cong fails to lift the debt ceiling the chain of events will be similar but worse as the assets will not be Frankenstein bonds made from mortgages but trillion $14.3 in US debt, the cornerstone of the global financial system. Absent that confidence the whole system collapses