Updates on the closure of the US government
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The falling “debt ceiling” is getting bigger for the Biden administration and proponents of its $ 3.5 million social spending package. Same for markets.
In terms of an agreement from July 2019, the debt ceiling law was suspended until 1 August this year. Now that the law is back in force, both Democrats and Republicans are underestimating the problems it can cause.
New loans by the US Treasury will not be allowed unless a new “debt ceiling” law is approved that allows loans above the existing level of about $ 28.5 tons.
This means that the government will have to partially stand still at a certain point in time without undergoing at least a new debt services law and a “continuous solution” for short-term financing.
Even without new programs, spending on operations such as flood relief, Covid-19 control and exodus from Afghanistan and resettlement will rise against the debt limit. Treasury Secretary Janet Yellen has set an “X” date for when the government will run out of cash sometime in october.
Note a reconstruction of society with a better infrastructure and more equity. The government may have to suspend hundreds of thousands of employees and contractors without pay.
Mitch McConnell, the Republican leader in the Senate, who is formally opposed to the administration’s tax program on the rich and spending on climate, health and social equity, offered no help raising the debt ceiling.
He only offers a “continuous resolution” up to a short term until the actual credits are adopted by both houses and reported to the law. McConnell has the votes to block a debt ceiling increase if he and his allies are dissatisfied with the tax and spending package.
And in the end, he indicated that after the short-lived resolution of about a month, the credits for social spending and taxes on the rich (or carbon) would not amount to $ 3.5 million. They may be half of them, and this is what Conservative Democratic Senator Joe Manchin is reported to be privately spoken. This gap between bid and offer offers a long legal battle.
All this uncertainty has a disruptive effect on markets around the world.
We had an indication of the risks and what actions the Fed can take from a transcript of a teleconference of the central bank’s policy-making Federal Open Market Committee on 16 October 2013.
It was released in January 2019 and is the most recent published report of the emergency actions the central bank plans to keep markets open in the event of a standstill, according to a person familiar with the matter. Yellen and the current chairman of the Fed, Jay Powell, were on the call as board members.
According to the transcript, the board has been updated on a joint memorandum containing nine ‘actions’ as part of the contingency plan. The first seven are now standard Fed market tactics, including so-called reverse repurchase operations — lending treasury securities to others to use as collateral.
Increasingly controversial, other actions are mentioned. Action 8 would remove treasury bonds with delayed or possibly delayed payments by buying them directly for the Fed’s account.
Action 9 will swap the bonds of clients or traders who are on the verge of default with bonds in the Fed’s portfolio that later have interest or principal payments.
Powell indicated that such action would be ‘horrific’, as it would mean that the Fed would enter a ‘difficult political world’, and it seems that this would make the problem go away. But he said he would not rule it out.
The Fed Council also needs the Treasury’s agreement to extend delayed principal payments by one day at a time, no later than 10pm each day, until the debt ceiling is set.
History and market people tell me that this process can contaminate treasury effects that run the risk of expiring during a downtime. Investors would avoid this, and operators of financial product settlement houses would at least ‘haircut’ the value of Treasuries or discounts as collateral for transactions. This will hamper markets for interest rate products and foreign exchange.
As a report from the US General Accounting Office on the closure of 2013 detailed: “Managers of one of the world’s largest derivatives exchanges have said they have asked their counterparties to use (as collateral) treasury bonds with principal or interest payments payable by mid-October.”
A shutdown and shutdown of debt ceilings is likely to cause disruptions in the mortgage markets. Audio battle stations.