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Tuesday, 21st March 2017

The Debt Ceiling Shortly Becomes Issue #1  

The US federal government's debt ceiling was reinstated on March 16th at around $20 trillion, the amount of debt outstanding that day. We are now rapidly approaching the time when the debt ceiling is the most important issue, financially and politically.

The Trump Administration has allowed the Treasury General Account (TGA) to run down to almost nothing. Essentially, the TGA is the Federal Government's checking account. As of March 15, when the debt ceiling moratorium ended, the TGA had only $23 billion, its lowest balance in years. On January 25, five days after Trump's inauguration, the TGA balance was $390 billion so the new administration has run down the account by an astounding $367 billion. This outflow does not reflect additional spending; rather, it's largely the result of not issuing new debt to cover debt that was expiring.

Here's the updated ugly picture:

Deposits with Federal Reserve Banks, other than Reserve Balances: U.S. Treasury, General Account

Team Trump could have used the last two months to increase the TGA balance and increase the debt outstanding, thereby effectively raising the ceiling before it was re-imposed. But instead, they lowered the debt outstanding and the eventual ceiling and slashed their cash position, thus greatly hastening the coming day of judgment.

Meanwhile, Washington and the media are consumed by Russiagate and the Republican drama of repealing and replacing Obamacare. Will they or won't they? Soon, no one will care because the government will not be able to pay its bills.

The US Treasury can implement so-called "extraordinary measures" (essentially selling marketable assets in other accounts they control), but the latest analysis suggests they could begin failing to pay all their bills as soon as Memorial Day.

We believe the infusion of cash from the TGA to the financial system probably accounts for much of the Trump Bump in the stock market. The cash outflow has now ended and the S&Ps have just experienced their first 1% down move in 110 days. Coincidence? We think not. Furthermore, Trump's tax-cutting and infrastructure-spending plans are going nowhere because the Treasury's overriding focus from now until a new debt ceiling is agreed will be on getting the government's bills paid without breaching the debt ceiling. How many House Republicans will vote for a debt ceiling increase? How much will House Democrats try to extort for their support of a debt ceiling vote that will likely need them to pass?

We are about to enter the Twilight Zone. There is nothing good in there for the stock market. But it sounds like gold could come in handy.