The ceiling below

This week the US runs out of money. Sort of. As if we didn’t already have enough to worry about.

The headlines may soon turn scary on this story, so let’s dissect it a little. The Yanks have a weird system since politicians want to govern the volume of bonds and other securities the country uses to raise money (above tax revenue) to run the place. They started this back in 1939. So every time the accumulated debt bumps up against the approved limit, a new one must be established.

These days the USA has over $31 trillion in debt, or 120% of the economy (our federal debt is $1.5 trillion, or almost 75% of GDP. Notsobad, in comp). The pre-approved ceiling is being hit again, and so Congress must set a new one – which has happened dozens and dozens of times over the past eighty years.

Here’s the problem. Kevin McCarthy.

  Did you follow the tortuous process the guy went through to become US Speaker? Sheesh. Fifteen votes. Normally it’s a slam-dunk, but not this time. Republicans now narrowly control the House of Representatives (Dems control the Senate) and a small group of ultra-right-wing-Trumpers were able to seize the agenda. No support for Kevin, and no plumb job, until he gave in to their demands. That included powerful committee assignments, the right to dump the Speaker form his job and an agenda of destroying Joe Biden and his spendy pals.

This suggests a debt ceiling crisis is probably coming. The last one was 12 years ago when Republicans again tried to corral government expenditures. At one point during the fight the stock market careened lower by 7% in a single day. After all, if the States runs out of cash, we’re all screwed. The world runs on US dollars and those $31 billion in American securities are held by a lot of important entities. Like China. American bonds are considered ‘risk-free’. Except when America lacks the cash to pay interest.

So would the Trumpers and their puppet Speaker be bold and daring enough to force the USA into default?

Nah. Of course not. The debt ceiling will be raised as there is no viable alternative. But not before the Biden administration is forced into a Code Red situation, federal programs are put into jeopardy, Washington is (maybe) shut down for a while and markets go hot and wild. This is utterly political, and all about the 2024 presidential election (in which D. Trump is a candidate).

Where are we now?

The money runs out on Thursday. Just before the weekend Treasury Secretary Janet Yellen said “irreparable harm” would be caused if Congress did not open the purse strings more. The market meltdown of 2011 could happen again, she said. The global financial system could be badly rattled.

The Republicans gave a group shrug. No new borrowing, they say, unless the White House agrees to spending cuts. Sucks to your ceiling. Yellen responded by saying “extraordinary measures” would have to be taken to keep the lights on. That includes shifting money within government to buy some time before major programs like Social Security go dry.

McCarthy says his gang might temporarily support more borrowing if Biden agrees to a cap on federal spending. So far the president has refused. After all, this has been one of the spendiest administrations in history – for post-pandemic recovery, infrastructure, climate change and social programs. The odds of a showdown seem to be growing. The crisis will not happen this week, but it could be upon us in a few months.

What to expect?

Mr. Market thinks everyone in Washington, DC is a dink and this is a tedious distraction. After all, we’ve got higher interest rates, persistent inflation, war in Ukraine, weather bombs, Elon Musk and corporate profits to worry about. A partisan war with serious financial overtones in this environment is like inviting Megan Thee Stallion home to meet your religious mama. There’s no good outcome.

Don’t be surprised to see the Vix shoot higher in coming weeks, or for equity markets to swing widely on a daily basis. It could last a while. Goldman Sachs figures this could go on until (maybe) October, and also says it will be “a close call” as to whether or not Republicans agree to a compromise.

Why would the Trumpers – who have McCarthy by the shorts – risk a debt meltdown?

Because ‘let it burn’ is a sentiment thrown out by alt-right believers on both sides of the Canada-US border. The worse conditions get, the more voters blame the guys in power and look for change. The days of getting into public life for the welfare of the nation are long in the rear-view. Never forget that people vote against leaders, not for them.

Will America default? Not a chance. Will the media have a cow? Absolutely. Should you respond? Don’t even think about it.

About the picture: “You have impacted our lives and you don’t even know us,” wrote Jennifer. “Here is Shelby, our Hound/Collie Kijiji neurotic dog who is the best dog ever but very emotional. And Morgan, who is also the best dog ever of course!”