US government shutdown looming for investors

The “debt ceiling” trap is even more pressing for the Biden administration and its supporters of the $ 3.5 trillion social spending program. The same is true for the market.

Due to transactions in July 2019, the debt cap law was suspended until August 1, 2019. Now that the law has taken effect, Democrats and Republicans may underestimate the problems it can. cause.

New US Treasury borrowing will not be allowed unless a new “debt ceiling” law is passed that allows borrowing in excess of the existing roughly $ 28.5 trillion.

This means that at some point the government will have to enter into a partial shutdown, at least without a new debt repayment law and a short-term “rolling fix” for funding.

Without a new program, spending on activities such as flood control, Covid-19 control, withdrawal from Afghanistan and resettlement would reach debt limits. Treasury Secretary Janet Yellen estimates the “X” day the government runs out of cash: October.

Don’t worry about rebuilding a society with better infrastructure and more equity. The government may have to suspend hundreds of thousands of unpaid employees and contractors.

Republican Senate Leader Mitch McConnell formally opposed the government’s tax system on the wealthy and spending on climate, health and social equality, but helped push through the increase in the cap on the debt. Not provided.

It only offers short-term “continuous resolutions” until the actual budget is passed by both houses and the law is signed. McConnell has a vote to prevent raising the debt ceiling if he and his allies are not happy with the tax and spending program.

And finally, he said, after a short and continuous resolution of about a month, social spending and tax allowances to the rich (or carbon) would not be $ 3.5 trillion. Show. They can be half of that, as Conservative Democratic Senator Joe Manchin reported. I have spoken about it personally. This gap between offers and offers comes before a long legislative struggle.

All of this uncertainty can have a devastating impact on markets around the world.

There were clues about the risks and actions the Fed may take Transcript Report of the Federal Open Market Committee conference call October 16, 2013 for central bank policy making.

It was released in January 2019 and, according to people familiar with the matter, urgent “actions” the central bank plans to keep the market open if it goes down. The last published account. Yellen and current Federal Reserve Board Chairman Jay Powell were called in as board members.

According to the transcript, the board was updated with a joint memo detailing nine “actions” under the emergency response plan. The first seven are now standard Fed market tactics, including so-called reverse repurchase transactions, lending Treasury securities to others to use as collateral.

Other actions are listed, but more controversial. Action 8 removes Treasury securities whose payment is or could be delayed by buying them entirely on behalf of the Fed.

Action 9 swaps the obligation of the default client or broker at risk for a bond in the Fed’s portfolio that later has interest or principal payments.

Powell said such actions would be “disgusting” because it meant the Fed would enter a “difficult political world” that seemed to solve the problem. But he said in the extreme that he would not exclude them.

The Federal Reserve Board also requires Treasury approval to extend overdue principal payments at a time, one day at a time, until 10 p.m. daily, until the debt ceiling is reached. be modified.

People in history and in the market tell me that this process is going to “contaminate” the risky Treasury securities when they close. Investors avoid them, and the operator of the clearinghouse for financial instruments at least “haircuts” or haircuts the value of the Treasury as collateral for transactions. It will clog interest rate products and foreign exchange markets.

As a report from the US Government Accountability Office on the details of the 2013 shutdown: “The manager of the world’s largest derivatives exchange said in mid-October that he had demanded that his counterparties do not not use government bonds (as collateral) that require payment of principal or interest. . “

Debt ceiling closures and freezes have the potential to disrupt the collateral market. Sound combat station.

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