“‘The Ceiling is the Roof’ — Michael Jordan” — The GOP
Michael Jordan once famously stated that “the ceiling is the roof.” Sensational.
So sensational, in fact, that Congressional members of the GOP seem to have borrowed his eloquence and taken that idea to the highest levels of policy, economics, and, of course, markets.
But, if you’re like me and also spent most of your time in 2011 strategizing how you were gonna be in the MLB, the NFL, and the NBA all at the same time, then you might not have the best memory of the last time this thing called the “debt ceiling” became truly problematic. Well time to grow up because, yes, it’s happening again.
Believe it or not, the U.S. government actually does have a legislatively enforced cap on the amount of debt it can take on. Right now, that cap sits at $31.4tn, roughly 1.3x our projected 2022 GDP. There’s no way a single entity could possibly take on that much debt, right??
Wrong. As of Thursday morning, the U.S. gov’t has officially reached its debt ceiling. That means that until there’s a change in legislation, or until we just say f*ck it and turn to martial law, our federal government will not be allowed to issue new debt.
And that’s a huuuuuge problem for a lot of people. Not only does that carry the potential to eviscerate programs like social security and healthcare for veterans, but the U.S. treasury market—the backbone of the financial world—comes under heavy threat.
That threat is born out of the possibility of the U.S. defaulting for the first time ever on its “risk-free” debt obligations.
All the political mumbo jumbo aside, that fact alone would likely cause a global recession almost immediately. As EY macro chief Gregory Daco warns, impacts include “severe financial market dislocation” and a “self-inflicted recession.” Not ideal.
But the thing is, we’re chilling for now. The Treasury has ~$395bn in cold hard cash sitting in Chair Yellen’s wallet. As she put it yesterday, the department is now instituting “extraordinary measures” to avert reaching the so-called “X-date,” the date at which the U.S. runs out of money for realsies.
Congressional statutes allow the Treasury some flexibility to divert spending from certain programs like suspending new investments in the plethora of government financial accounts. That’s the extraordinary measures we’re talking about here. That pile of cash is expected to hold us over until anywhere from May to November of 2023, depending on whose forecast you believe and how Treasury chooses to react until then.
This could all be solved in several different ways. First, and the most non-brainless way to do so, is through raising the ceiling via legislation. House GOP members are staunchly against this idea unless their fellow legislators agree to drastic spending cuts. This is exactly what happened in 2011 when S&P actually downgraded U.S. debt from its AAA rating for the first time ever until a near-midnight compromise was reached.
Other ideas get a little funky. For example, it would technically be possible for Treasury to mint something like a $1tn “coin” and deposit that in the account at the Fed, allowing interest and principal payments on debt to be made.
Another solution would be to have Joey B take over and use the heavily debated clause of the 14th amendment to unilaterally raise the debt ceiling. The tough part is that if the government shuts down from this, he’d have no staffers to point him to his desk or wherever he needs to go to sign the legislation. He, like all of us, would be lost.
To all the members of Congress reading this (as I’m sure they all do), please save my portfolio. 2022 was bad enough, and I need at least one day per millennium where I don’t live in constant fear of my past investment decisions. For now, it’s fingers crossed.
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Hi TheDailyPeel, any of these threads helpful:
More suggestions...
I hope those threads give you a bit more insight.
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