September 11, 2013
The theatrics this time around will certainly be spectacular, but the end result will be the same: after much yelling, screaming, posturing and crying, the US debt ceiling will once again be raised. The next question: what will be the new and improved debt ceiling, since $16.7 trillion in total debt was hit back in May? According to the Bipartisan Policy Center, the minimum required permitted debt at December 2014 will be an increase of $1.1 trillion, or $17.8 trillion in total, or about 105% of GDP assuming current growth rates and assuming no more upward revisions to GDP which magically add $600 billion out of thin air the total number.
However, while the final number may end up being more or less, the more relevant implication is that the monthly net debt growth of just under $60 billion, of which less than half be accounted for by the longer, QE-affected end, shows just how urgent the impetus is on the Fed to reduce its monthly monetization amount. After all, the Fed already does monetize about 90% of all Treasury paper with duration exposure (5Y+). If it continues to do nothing, this number will rise to over 120%, and soak up collateral at such a pace that it will make the TBAC’s head spin, and extract every last ounce of liquidity from the marginal bond market.
Which goes back to square one. The reason for this slowdown is a transitory drop in US deficit funding needs: needs which surge once more in 3-4 years due to demographics. And since there is no way to avoid runaway spending in the second half of the decade, the Treasury may as well go ahead and ramp up bond issuance, and thus demand more Congressional spending right now. They don’t call the Debt Ceiling the “Debt Target” without a reason…
Which is where such episodes as Syria fall in.
Expect many more false flags in the near future, and expect the December 2014 debt ceiling to be substantially higher than that projected above.
This article was posted: Wednesday, September 11, 2013 at 11:42 am