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Tuesday, 14th March 2017

The Debt Ceiling Returns  

One of the best kept secrets, it seems, is the return of the U.S. debt ceiling on March 15. There should be no surprise. The suspension of the debt ceiling, part of the October, 2015 deal between Speaker Boehner and President Obama, was always going to expire tomorrow. So, whatever the amount of Federal Government debt is outstanding on March 15 (almost $20 trillion) is the limit that can be issued until Congress agrees to raise it.

You may recall that the agreement to suspend the debt ceiling, allowing debt to increase without limit, was one of the nastiest political fights Washington has seen. The coming battle over raising the ceiling promises to be no easier. There are two issues this time around which will add to the tension.

First, President Trump is going to need an extra lift in the ceiling to accommodate his infrastructure and tax reduction initiatives. Many Republicans were elected to reduce the deficit so they are likely not going to help approve a higher ceiling. The Democrats whose support may be needed are likely going to make their support contingent upon more social spending and concessions on the replacement of Obamacare.

Second, the U.S. Treasury is not set up for a lengthy debate because it has the lowest cash balance in many years. There is a real risk that the U.S. Government is not going to pay all its bills in the near future...which is not default because commitments to debt holders will get priority in the allocation of available cash. But the shock value of not paying all bills on a current basis could be immense. And how can the markets expect the much anticipated Trump stimulus to proceed on schedule with the debt ceiling issue unresolved?

When President Trump took over the Executive Branch of the U.S. Government on January 20, there was about $390 billion in the U.S. Treasury's General Account (TGA) which you can think of as the Federal Government's checking account. That's more than usual. As of March 8th, there was only $66 billion in the account. This means that the balance has dropped $224 billion over the past six weeks. About $87 billion of that was actually used to pay down debt that could have been re-issued but wasn't. Here is the chart.

Deposits with Federal Reserve Banks, other than Reserve Balances: US Treasury, General Account

Over the course of a year, the U.S. Government spends on average about $3 billion more PER DAY than it takes in. That deficit is based on existing programs, not any new ones that the new President has promised. On April 15, the government gets a cash infusion from income tax receipts, which helps for a while. But cash flow quickly goes negative again. The best guesses we have seen indicate that the Treasury will be out of cash by July at the latest.

What was the Treasury thinking, letting the cash balance run down in the face of a re-imposed debt ceiling? The cash the TGA does not have is in the financial system. So, the Trump Administration has in effect pumped $224 billion into the financial system (i.e. the markets) over the past six weeks which probably has a lot to do with the run in the stock market during that time. Perhaps this was the plan? Perhaps it was neglect? Or perhaps the administration wants a crisis for some reason? If so, they are probably going to get one

The coming debt ceiling confrontation will not be good for the stock market. Nor will it be good for the Trump stimulus plan. It probably will be good for gold, in our opinion.