Debt Ceiling Deal Amid Looming Inflation, Bankruptcy & Recession Risks
The cap on government spending in Washington’s deal to raise the federal debt limit adds a fresh headwind to a US economy already burdened by the highest interest rates in decades and reduced access to credit.
The tentative deal crafted by President Joe Biden and House Speaker Kevin McCarthy over the weekend — assuming it’s passed by Congress in coming days — avoids the worst-case scenario of a payments default triggering financial collapse. But it also could, even if at the margin, add to risks of a downturn in the world’s largest economy.
Federal spending in recent quarters has helped support US growth in the face of headwinds including a slump in residential construction, and the debt-limit deal is likely to at least damp that impetus. Two weeks before the debt-limit deal, economists had calculated the chance of a recession in the coming year at 65%, a Bloomberg survey showed.
For Federal Reserve policy makers, the spending cap is a fresh consideration to account for as they update their own projections for growth and the benchmark interest rate, which are due for release June 14. Futures traders as of late last week were pricing in no change in rates for the mid-June policy meeting, with one final 25 basis-point hike seen in July.
“This will make fiscal policy slightly more restrictive at the same time that monetary policy is restrictive and likely to get more so,” said Diane Swonk, chief economist at KPMG LLP. “We have both policies moving in reverse and amplifying each other.”
US stock futures advanced, with contracts on the S&P 500 index up 0.3% as of 10:40 a.m. in New York. Treasuries trading was closed for the Memorial Day holiday, but 10-year Treasury futures were up, sending the implied yield down slightly to 4.42%.
The spending limits are expected to be applied starting with the fiscal year beginning Oct. 1, though it’s possible small effects will emerge before then — such as through clawbacks of Covid assistance or the impact of phasing out forbearance toward student debt. Those would be unlikely to show up in GDP accounts, however.
‘Gimmickry’ Factor
Tobin Marcus, Evercore ISI’s senior US policy and politics strategist, also advised that it will be important to assess the degree to which spending limits are “pure gimmickry” as negotiators sought to bridge differences via accounting maneuvers.
Even so, with spending for the coming fiscal year expected to be held around 2023 levels, what restraint the deal does impose would kick in at a moment when the economy might be in contraction. Economists surveyed by Bloomberg previously penciled in a 0.5% annualized drop in gross domestic product for both the third and fourth quarters.
Bloomberg Economics: Cost of Debt Deal May See 570,000 Hit to US Employment
“Fiscal multipliers tend to be higher in a recession, so if we were to enter a downturn, then the reduced fiscal spending could have a larger impact on GDP and employment,” Michael Feroli, chief US economist at JPMorgan Chase & Co., said in an emailed response to questions.
JPMorgan’s base case has the US tipping into a recession in the second half of 2023.
To the extent that the economy does slow, fiscal policy may work in tandem with monetary policy to quell inflation, which a report showed last week remains well above the Fed’s target.
“It’s an important development — it’s been more than a decade since monetary and fiscal policymakers were rowing in the same direction,” said Jack Ablin, chief investment officer at Cresset Capital Management. “Perhaps fiscal restraint will be another ingredient to weigh on inflation.”
Despite some 5 percentage points of Fed rate hikes since March of last year — the centerpiece of the most aggressive monetary-tightening campaign since the early 1980s — the US economy has so far proved resilient.
Unemployment is at its lowest in more than a half century, at 3.4%, thanks to historically high demand for workers. Consumers still have excess savings to use from the pandemic, a San Francisco Fed study showed recently.
Fed officials will have a range of considerations, because aside from the deal’s impact on the economic outlook, it will have some implications for money markets and liquidity.
The Treasury has run down its cash balance to keep making payments since it hit the $31.4 trillion debt limit in January, and once the ceiling is suspended by the coming legislation, it will ramp up sales of Treasury bills in order to rebuild that stockpile to more normal levels.
That wave of newly issued T-bills will effectively drain liquidity from the financial system, although its exact impact could be challenging to assess. Treasury officials may also arrange their issuance to minimize disruptions.
With the Fed removing liquidity on its own, through running off its bond portfolio at a clip of up to $95 billion a month, it’s a dynamic that economists will be closely watching in coming weeks and months.
Longer term, the scope of fiscal restraint that negotiators have crafted is almost certain to do little for the trajectory of federal debt.
The International Monetary Fund last week said that the US would need to tighten its primary budget — that is, excluding debt-interest payments — by some 5 percentage points of GDP “to put public debt on a decisively downward path by the end of this decade.”
Keeping spending at 2023 levels would fall well short of such major restraint.
“The two-year spending caps at the core of the deal are somewhat in the eye of the beholder,” Evercore ISI’s Marcus wrote in a note to clients Sunday. His assessment: “Spending levels should stay roughly flat, posing minimal fiscal headwinds to the economy while also only marginally reducing deficits.” – Eric Martin, Christopher Condon and Viktoria Dendrinou
Bankruptcy Caravan Is Arriving: Time to Pay for the Easy Money
The character Mike Campbell in Ernest Hemingway’s 1926 novel The Sun Also Rises was asked about his money troubles and responded with a vivid description embracing self-contradiction: “‘How did you go bankrupt?’ Bill asked. ‘Two ways,’ Mike said. ‘Gradually and then suddenly.’”
Ground-hugging interest rates for more than a decade kept the inefficient and the incompetent in business. Now, the jig is up, with a Mother’s Day weekend corporate massacre that saw the bankruptcies of seven corporations, each with liabilities of nine figures or more—in four cases, with more than a billion dollars in liabilities each.
This cluster of large bankruptcies happening in less than forty-eight hours is the most since 2008. Libby Cherry writes for Bloomberg (reprinted on Time): “Firms across every sector are struggling with higher interest costs—making it more challenging to refinance loans and bonds—while corporate executives are drawing more scrutiny from investors and creditors.”
The corporate restructurings cover a wide range of businesses: Vice Media Group, KKR-backed Envision Healthcare, security company Monitronics International, chemical producer Venator Materials Plc, oil producer Cox Operating, fire protection firm Kidde-Fenwal, and biotechnology company Athenex.
The only thing these firms had in common was lots of debt that was unserviceable with today’s higher interest rates. Murray Rothbard wrote in America’s Great Depression:
The problem of the business cycle is one of general boom and depression; it is not a problem of exploring specific industries and wondering what factors make each one of them relatively prosperous or depressed. . . . What we are trying to explain are general booms and busts in business.
In considering general movements in business, then, it is immediately evident that such movements must be transmitted through the general medium of exchange—money.
If you haven’t been losing any sleep over these corporate failures or have been blissfully unaware, the weekly St. Louis Fed Financial Stress Index is with you, measuring no stress. Above zero on the index means there is stress in the market—when Silicon Valley Bank failed, the index jumped to 1.54. Zero means normal market conditions, and a negative reading signals below-average stress. The index is currently reading negative.
Corporate bankruptcies, the debt ceiling showdown, bank failures—nothing to see here. Providing context, Wolf Richter writes that “During the Financial Crisis, just after the Lehman bankruptcy, the index spiked to +9.25, so that’s about six times the value during the SVB collapse (+1.54).”
With everything so calm, it’s no wonder Fed heads claim to blindly have their noses to the inflation grindstone. Nonvoter Federal Reserve Bank of Richmond president Thomas Barkin told Bloomberg’s Michael McKee that he wants to reduce inflation. “And if more [interest rate] increases are what’s necessary to do that I’m comfortable doing that.”
Another nonvoter, but frequent talker, Federal Reserve Bank of Cleveland president Loretta Mester said the Fed can “do its part” by curbing inflation.
Of course, as Rothbard explained, the Fed actually creates inflation, instead of curbing it. However, higher interest rates will mean a bumper crop of bankruptcies.
TheStreet reports:
The most recent S&P data show 2023 corporate bankruptcies rising at an alarming clip. Data show 236 bankruptcies were recorded through the end of April 2023 (109 had been recorded over the same time period last year). UBS also found in a recent study that bankruptcies worth $10 million or more had a rolling average of about 8 per week.
There’s been much talk about the “everything bubble.” Perhaps that will now include bankruptcies, gradually, then suddenly. – Doug French
Republicans Fail on the Debt Ceiling in 2023
Whitson G. Waldo, III – The United States House of Representatives’ passage of the Limit, Save, Grow Act of 2023 is a big Republican failure addressing the debt ceiling. The debt ceiling would be raised above the current limit of $31 trillion by $1.5 trillion or through March 2024, whichever comes first. Notably, “official cost estimates have not yet been released,” so the projected paltry $480 billion annual spending reductions likely will be much less. This is because this bill “does not list any specific cuts.” Fortunately, it is expected that Senate Democrats will vote down this execrable bill.
Campaigning Republicans are invariably aghast at deficits in the billions. Elected Republicans, however, are comfortable with deficits in the trillions based on last year’s appropriations passed by the most progressive Congress and administration in this country’s history.
The House bill is a “me too, but a little less” action to grow ever bigger government more slowly. Lone Rep. Tim Burchett (R-TN) stood against the farce, insisting on “true debt reduction, not rate of growth.” Declining to exercise leverage over the process, the Freedom Caucus is losing legitimacy and should rename itself the Freedom Lost Caucus.
The list is short and thin for merits to the House bill. Disqualified as a merit is the general, unspecified limit to grow spending—excluding the military—at 1 percent annually. Otherwise, the student loan forgiveness program and income-driven repayment plan would be blocked. The Internal Revenue Service appropriation of $80 billion for additional employees would be rescinded. Recipient work requirements would be added for food stamps and Medicaid. There would be a repeal of unreliable (i.e., solar and wind) energy and electric vehicle tax credits. Unused covid-19 funds would be clawed back.
Because the House initiates appropriations, no laws need to be passed if any government program, commission, office, agency, bureau, department, or administration is defunded completely. The House has authority to act unilaterally this way. Spending reductions that stop short of elimination, the path to conservative defeat, require agreement between the House, the Senate, and the White House. It won’t get easier passing a balanced budget later, and the window for this is closing quickly. We can look into the dismal future by looking at the similar past actions of Argentina, Venezuela, and the PIGS (Portugal, Italy, Greece, and Spain) with their out-of-control spending and monetary policies.
Consider the categories of individuals, groups, and issues supposedly forming the base for the perpetual political success of a realigned Republican Party. Opportunities for conservatives include parents and parental rights, the working class composed of the poor and middle class who could benefit from capitalism and its attendant prosperity, senior citizens, and citizens desiring safety and security.
Instead, parents aren’t supported. The Department of Education isn’t eliminated, which would be another step toward universal school choice. LGBTQ recruitment into sexual deviancy continues apace, with increased funding for Planned Parenthood and the medicopharmaceutical industrial complex anxious for lifetime profits from transgender transitions.
Prosperity isn’t supported for poor and middle-class workers. A balanced budget is an imperative unrecognized by elected Republicans. The Environmental Protection Agency, dedicated to antihumanism and environmental radicalism, isn’t defunded. The Department of Energy, dedicated to the Green New Deal, is still funded. Neither the Department of Commerce, dedicated to globalism, nor the Department of Health and Human Services, dedicated to the evisceration of the intact nuclear family, is defunded as well. Crony capitalist initiatives such as the funding for the Creating Helpful Incentives to Product Semiconductors (CHIPS) Act and tax credits for ethanol production should stop.
Congressional deficit spending requires the monetization of the debt by the Federal Reserve, which causes monetary inflation. Lower real wages and fewer opportunities in a more stagnant economy cause lower standards of living.
Senior citizens are under a cloud even though “cuts” would not apply to benefits programs such as Social Security and Medicare. Only a balanced budget supports senior citizens’ interests. Balancing the budget is a tougher proposition every year. The reason is that the accumulated profligate deficit spending by the uniparty, adding up to our national debt, requires interest payments. The fraction of the budget going to interest payments—currently at about 7 percent of all federal outlays—keeps climbing, increasing pressure for program cuts. If elected Republicans make hard choices now, then Social Security and Medicare won’t have to be targeted later.
Liberty isn’t advanced. Safety and security aren’t supported. At the global level, the incompetent and tyrannical World Health Organization, the United Nations, the World Economic Forum, and the socialist and crony capitalist International Monetary Fund are fully funded. Forever wars supported by the military industrial complex, the corrupt and tyrannical Volodymyr Zelenskyy, and the North Atlantic Treaty Organization are fully funded. At the national level, the corrupt and unreformable Federal Bureau of Investigation; Bureau of Alcohol, Tobacco, Firearms, and Explosives; and US Customs and Border Protection agencies are fully funded. The environmental, social, and governance; critical race theory; and diversity, equity, and inclusion frameworks are fully supported as well. The woke military is exempt from cuts.
Significantly, Congress isn’t insisting on adherence to the Constitution with respect to regulations and executive orders. The Constitution authorizes only Congress to pass laws, and this authority may not be delegated. All regulations and executive orders must be submitted to Congress as proposals for additional legislation. Elected Republicans are sanguine that the regulatory state and imperial White House make their own laws thereby directly threatening liberty and prosperity.
Neither Donald Trump nor Ron DeSantis has heartburn. Trump’s first-term legacy was a reduction in the flow of illegal immigrants, regulatory state rollback, and the recission of Barack Obama’s executive orders. However, President Trump signed every massive omnibus spending bill, each with higher deficit spending, sent to his desk. As governor, DeSantis must balance the state budget, but the virtues of doing this at the national level elude him to the extent he can’t articulate why a balanced budget is necessary for liberty and prosperity.
What recourse do voters have? Primaries are rigged by the two political parties to return incumbents to office. Nevertheless, it is within primaries that authentic conservatives can be elected. Conservatives should learn the lesson of former progressive House Speaker John Boehner, who encouraged large numbers of candidates to oppose him in his primary. There needs to be only a single authentic conservative running against the incumbents. All primaries should require a majority winner or have a runoff.
With a divided government, the legislation likely to pass would be a provision of a line-item veto by the president. Such a law would eviscerate the “take it or leave it” attitude implicit in omnibus spending bills or the huge bundled “single appropriations” bills envisioned by progressives wearing red jerseys. Congress would pass the buck to the White House to be fiscally responsible.
The House bill raising the debt ceiling is good news for the wealthy. In the face of profligate congressional spending, the Fed must eventually relent and go back to monetary easing, which will reinflate the asset bubbles in the stock and residential housing markets. The wealthy, having a higher percentage of disposable income with which to invest, will benefit disproportionately. There will be a further increase in wealth inequality between the poor and middle class versus the wealthy.
Elected Republicans are dedicated to vigorous tongue lashings, finger wagging, and foot stomping. Unfortunately, only campaigning Republicans recognize the virtues of a much smaller government. Voters should recognize the difference between campaigning and elected Republicans and know that elected Republicans are dedicated to the decline of the country. The decision to vote for an incumbent in the general election just depends how badly you want to see the progressive wear your team’s jersey color.
Is The Almighty King Dollar Finally Getting Dethroned?
Please check back for new articles and updates at Commoditytrademantra.com