Posted by on August 28, 2017 3:53 pm
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Categories: Belgium Business CDS Congress Credit Default Swaps Debt Ceiling default Deutsche Bank Economy Economy of the United States Greece italy Medicare Mexico national security north korea Political debates about the United States federal budget Politics Portugal United States United States debt ceiling United States debt-ceiling crisis US Federal Reserve

Via Snake Hole Lounge blog,

The US Statutory Debt Limit, a failed tool to halt the endless growth of Federal debt issuance, is once again in play at nearly $20 trillion. It was only at $6 trillion in 2002.

The problem, of course, is runaway Fed spending which is currently at around twice that of Federal current tax receipts, requiring that the deficit be funded by issuing Federal debt (or raising taxes and/or cutting Federal spending).

The staggering increase in Federal debt starting in 2007 also resulted in a large spike in public debt to GDP.

The US has joined the European PIGs (Portugal, Italy, Greece, as well as Cyprus and Belgium) in having debt as a percentage of GDP being over 100%. The fourth debt piggie is Spain at 99.40% debt to GDP.

The core problem with Federal spending, now and in the future, is mandatory (entitlement) spending.

Of the entitlement spending, Medicare is growing at an unsustainable rate (although Medicaid growth is no slouch either).

So we are on an ussustainable track in terms of spending. How does “the wall” with Mexico fit it? It could be funded with more taxation, or spending cuts on other programs. Democrats LOVE raising taxes, but not to build a wall. Republicans are split on building a wall (open border freemarketeers versus those with national security concerns).

My colleagues at my former employer Deutsche Bank have attempted to lay out possible funding scenarios. Although I think the odds of deep spending cuts is about as likely as North Korea embracing personal freedom and capitalism.

With explosive Federal spending and projections of public debt exceeding first $20 and then $30 trillion, I have little doubt that Congress and President Trump will agree on a debt limit increase even if there is a momentary government shutdown.

But right now, credit default swaps are signaling no shutdown, particularly in comparison to previous shutdown fears surrounding debt ceiling increases (orange boxes).

So, there is nothing YET showing up in the CDS data. We are seeing an increase in Treasury bills rates even when the probability of a Fed increase in their rates is very low for the next year.

The probability of a US default is around 0.04%.

But there is also a realization that while there was intial enthusiam that Trump would lower taxes and deregulate the economy,  there has a steady decline in enthusiasm over his promises since Congress is obstructing most of Trump’s economic agenda.

We can hope that Congress and President Trump follow the advice of the band Canned Heat and work together. 

But we do know that Congress loves to spend money, so they have a natural mutual allegiance to raising the debt ceiling.

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