The Debt Ceiling, the Dollar, ChatGPT and Me

For those of you who would prefer to listen:

The Debt ceiling is back on the public radar this week. It never left ours. We’ve considered it amongst the greatest risks in 2023; Still do. The issue is expected to ultimately get resolved. But the deadline could come sooner. The political process will undoubtedly bring stress. That’s the Washington way. Making things more complicated, this Congressional group seems as fixated on division as we’ve ever seen. So, there’s that too.

House Speaker Kevin McCarthy drew up a bill that would raise the $31.4 Trillion debt ceiling by $1.5 Trillion. It also limits Federal spending by $4.5 Trillion, which should eliminate the risk of a default for another year. The House will vote on it next week. The White House and fellow Democrats immediately declared it a non-starter, claiming they will only accept a clean debt increase with no spending cuts. The challenge for the Speaker is not just with Democrats, however. There’s no guarantee he can get enough of his fellow Republicans on board either. Republicans have their own internal divisions.

Tax Day in America came and went this week. Well, except for California. Tax Day in the Golden State got pushed out to October by those relentless atmospheric rivers. That could play a role in this potential debt crisis as California is a material contributor to America’s Economy and tax revenue. In 2021, California generated 2.5X the revenue of New York, which is the second largest state contributor. Tax collections were already expected to be down after the brutal year of 2022. There’s going to be even less money in the Federal coffers this Summer.

The Stock Market doesn’t seem much concerned about this debt default threat. The Bond Market sure does. The yield curve remains inverted, which is a traditional sign of stress ahead of an event. What’s worse is the spread of US credit default swaps hit a multi-decade high this week. The cost to insure America’s debt against default doubled since just January. Economists and analysts continue to study tax receipts to see if the Treasury Department’s extraordinary funding measures will be able to last through Summer. The Stock Market has a track record of ignoring things until it can’t. It seems like borrowed time.

The US Dollar is the global reserve currency. Over 90% of global trade is sourced in Dollars. Its dominance comes from the fact that it’s the most stable currency on the planet. For nearly a century, there has been high demand for Treasury securities globally. The United States government has long been able to borrow money at will at the lowest interest rates around. There’s risk it doesn’t last though. If America’s debt starts to be priced on the nation’s willingness to pay its bills, rather than its ability, the consequences could be drastic. It would lead to short-term Market confusion and uncertainty to long-term economic damage, which would extend far beyond our borders.

If investors lose confidence in the stability of US Treasuries, they will likely sell them. That would weaken the Dollar and send borrowing costs higher. Previous debt ceiling showdowns saw interest rate spikes. It didn’t last long though. In 2011, when America lost its AAA credit as it came dangerously close to defaulting, the Stock Market fell, but Treasuries actually rallied. The Market made it clear that America still had AAA status. It was our government that didn’t deserve the premier rating. So here we go again.

As a refresher, the debt ceiling was implemented in response to World War I. It intentionally provides limits to Federal spending without tedious micromanagement. Also stated in the 14th Amendment of the Constitution, the nation’s public debt shall not be questioned. America’s debt was never intended to be a political tool. Limitless spending was never intended either. It all has consequences. This is yet another test for the American Experiment.

Speaker McCarthy made a move this week. He knew it would not be popular with Democrats. But it appeals to many Republicans and Independents who believe Washington has a spending problem. It’s also being reported that some Democrats believe that President Biden’s categorical refusal to engage with the House Speaker may need to change, especially if House Republicans manage to pass their bill as planned next week. President Biden and Speaker McCarthy last met in February to discuss the debt limit. Democrats can’t afford to be perceived as the ones not willing to come together for a debt deal.

From our Washington sources:
“McCarthy is trying to force negotiations with his letter, but Biden is linking making conversations dependent on House Rs producing a budget b/c he knows they will struggle to do so. Technically there is no need for House Rs to produce a budget, but Biden wants to avoid negotiating against himself, and he wants to call attention to Rs’ failure to provide an alternative”.

Democrats and Republicans will reach a deal at the eleventh hour, they think, avoiding an outcome where the Treasury won’t have sufficient funds to pay all the federal government’s bills. To get the votes to raise the debt ceiling in both the House and Senate, “Democrats are probably going to have to offer a modest policy concession to Republicans, which may or may not have anything to do with the budget. We put about 10-15% odds there is no deal by the X-date, and it looks increasingly likely that deadline will fall in June.”

We agree that a deal ultimately gets done on the debt ceiling. Some sort of spending cuts need to be included. With our Federal debt over $31 Trillion accounting for nearly 120% of GDP, fiscal discipline needs to be restored. It’s been an issue throughout this 21st century, from both political parties, and it’s unsustainable. We think the Dollar will maintain its universal currency status for the foreseeable future, despite many foreign attempts to reduce it. Treasuries, backed by the full faith and credit of the United States government, will remain the risk-free asset. But the process in the coming weeks and months will likely not be enjoyable. But realistically, there is no alternative. As Former Treasury Secretary Larry Summers so eloquently said regarding the Dollar: “Europe is a museum. Japan is a nursing home. China is a jail. Where else are you going to put your money?”

Larry Summers never holds back.

Out of pure curiosity, I asked ChatGPT to write a piece on the Debt Ceiling and its impact on the Dollar and Treasuries. I wanted to see how it compared to my piece this week. Of course, it’s not an apples-to-apples comparison. But I was curious to see how Artificial Intelligence would approach the subject. I was quite confident it would be a much different approach than mine. This is what ChatGPT produced, within seconds:

The debt ceiling is a legal limit on the amount of debt that the United States government is allowed to accumulate. Once the debt ceiling is reached, the government must either cut spending, increase revenues, or borrow more money to pay its bills. This can have a significant impact on the value of the Dollar and Treasuries, which are government-issued debt securities.

Impact on the Dollar:

When the debt ceiling is reached, it can cause uncertainty in financial markets and lead to a decrease in investor confidence in the US government’s ability to manage its finances. This can cause the value of the Dollar to decrease, as investors may seek safer havens for their money.

Additionally, if the government is forced to cut spending or increase revenues to avoid reaching the debt ceiling, it can have a negative impact on the Economy. This can lead to a decrease in consumer spending and investment, which can also cause the value of the Dollar to decrease.

On the other hand, if the government is able to successfully manage its finances and avoid reaching the debt ceiling, it can increase investor confidence and lead to a strengthening of the Dollar.

Impact on Treasuries:

The debt ceiling can also have a significant impact on the value of Treasuries, which are government-issued debt securities that are used to finance government operations. If the government is unable to pay its bills or defaults on its debt, it can lead to a decrease in the value of Treasuries.

However, in the short term, the value of Treasuries may actually increase as investors seek safer havens for their money during times of uncertainty. This can cause yields on Treasuries to decrease, as investors are willing to accept lower returns in exchange for the perceived safety of government-issued debt.

If the government is forced to cut spending or increase revenues to avoid reaching the debt ceiling, it can lead to a decrease in the supply of Treasuries, which can cause the value of Treasuries to increase. Conversely, if the government is forced to borrow more money to pay its bills, it can increase the supply of Treasuries, which can cause the value of Treasuries to decrease.

In conclusion, the debt ceiling can have a significant impact on the value of the Dollar and Treasuries. Uncertainty surrounding the government’s ability to manage its finances can cause the value of the Dollar to decrease, while a successful management of the government’s finances can lead to a strengthening of the Dollar. The debt ceiling can also cause short-term fluctuations in the value of Treasuries, as investors seek safer havens for their money. Ultimately, the impact of the debt ceiling on the Dollar and Treasuries will depend on a variety of economic and political factors.

Artificial Intelligence is entering every aspect of our lives. Much of it for the good. Some of it might be not-so-good. That’s yet to be determined. These days, information travels at the speed of light. The problem is, knowledge doesn’t. Information without knowledge can be a dangerous thing. Knowledge is power.

I thought this might be a fun experiment. I hope you found it interesting and valuable too.

My goal in all of my writings is to inform, educate and perhaps even entertain you a bit. I will never waiver from that. 

Have a nice weekend. We’ll be back, dark and early on Monday.


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