To The Moon

The debt ceiling is the total amount of money the U.S. government is allowed to borrow to meet its existing legal obligations, which also include Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments. The US Congress has continually authorized trillions of dollars in spending over the past 15 years, tripling the US debt since 2009. During those 15 years, the U.S. government has regularly run into the debt ceiling. The solution was by raising the ceiling or temporarily suspending its application. Since the introduction of the debt ceiling, there has been much debate from time to time, but in the end, the ceiling has always been raised. However, there have been several occasions when the U.S. government has shut down for several days. This happened, for example, under Bill Clinton in the 1990s when the government shut down for 21 days. Also 10 years ago under Obama, the U.S. government shut down for 13 days. In the mid-1990s, it was the Republican Speaker of the House, Newt Gingrich, who thwarted a Democratic president. Ten years ago, it was members of the Tea Party, a conservative wing within the Republican party, who pushed for balanced budgets. After the recent mid-term elections, the Republicans again have the majority in the House of Representatives and thus once again the ability to thwart a Democratic president.

Although there is still far-reaching polarization in U.S. politics, once again there will be a solution to reaching the debt ceiling. Only it is not exactly clear when the ceiling will be reached. Until recently it would fall somewhere in the July-September period, but last week Treasury Secretary Yellen indicated that the bottom of the treasury is in sight and that as early as June 1 the debt ceiling will be reached, based on tax revenues to date. Not until June 15 is the deadline for many companies to pay taxes (on a quarterly basis) will enough money come in again. With that, the big problem this time is the time factor because negotiations between the two sides always take a long time. So it doesn't help that it took the Republicans themselves a whopping 15 rounds to appoint their own Speaker of the House, Kevin McCarthy. The party is clearly not aligned internally. But given the presidential election next year and the fact that more than 70 percent of Americans want to avoid the government shutdown, it is natural that a deal will be reached. Possibly an interim deal of several months may be needed to give negotiators more time. This could even put a temporary brake on U.S. government spending, and in monetary terms, it would not even be a bad thing, as it would depress economic growth and thus inflation.

The items now on the table are an increase in the debt ceiling to a level that will not have to be voted on again until after the presidential election in 2024, there is further talk of taking back budgeted but not yet spent money for Corona, and the proposal is to establish a commission that will also look at the long-term (off-balance sheet) obligations of the U.S. government. Furthermore, it is, of course, strange that there is a fairly structural budget deficit of about 6 percent of GDP, while at the same time, the US economy is doing so well that there is full employment.

The debt ceiling discussion is reflected in the interest rate curve. Debts maturing before the debt ceiling is reached have lower interest rates than those after. The likelihood of a U.S. government default is small, but it could delay interest payments and repayments. It is likely that the U.S. government will give priority to paying interest on the debt over paying social benefits, for example. Indeed, the moment payments on government bonds are not made or are made late, it could put companies or financial institutions at risk. Especially with the rampant banking crisis an unattractive picture.

In the past, debt ceiling negotiations often did cause temporary currency pressure. The (partial) US government shutdown is unpleasant for the people it affects, but the impact on the economy was limited in the past. This time, reaching a deal may cause liquidity in the market to deteriorate rapidly thereafter, as the U.S. government will rapidly issue some $1 trillion in T-bills. In recent months, the U.S. government's cash reserves have declined rapidly and need to be replenished. This may be an additional argument for the Federal Reserve to start easing its policy. An additional argument for this is that the rise in interest rates to date has increased the U.S. government's interest expense by about $500 billion a year, which is equal to about 10 percent of annual tax revenues.