by Jim Rickards, Daily Reckoning:
The “X-Date” is the day the U.S. Treasury goes broke. It’s not the same as the debt ceiling but it is a consequence of the failure of Congress to raise the debt ceiling.
Right now, the Treasury is at the debt ceiling. That means it has no legal authority to issue net new debt. It can issue new debt if old debt is maturing. That keeps the total debt unchanged; you’re just rolling over maturing debt into new debt without increasing the total debt.
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The problem is that the U.S. is running $2 trillion per year deficits. It’s not enough to just roll over existing debt. You have to issue new debt to finance the deficits and that’s where the debt ceiling bites.
How is the U.S. Treasury paying its bills today without new debt? They’re playing shell games, playing fast and loose.
Shell Games
There is some net cash flow from tax collections in the April time frame although that’s being rapidly depleted by tax refunds. There are some other tax collections including excise taxes.
The Treasury has some slush funds including the Exchange Stabilization Fund (ESF), currently over $100 billion. The ESF was created in 1934 using the profits from FDR’s confiscation of gold at $20 per ounce and subsequent revaluation to $35 per ounce.
It has been used numerous times including in the 1994 Mexican bailout that Congress refused to authorize (ESF use has no congressional oversight).
Recently part of the ESF was used to bail out Silicon Valley Bank. But eventually even the cash flow and the slush funds run out of juice. Then the Treasury goes broke. That’s the X-Date.
JPMorgan Convenes a War Room
Treasury Secretary Janet Yellen recently estimated the X-Date is June 1. Yellen knows little about monetary or fiscal policy and her June 1 date was probably a political ploy to put pressure on Republicans to raise the debt ceiling without conditions, as favored by the White House.
We shouldn’t rely on Yellen’s estimates; she’s not very competent at this. That’s being generous. She’s over her skis. All the same, there is an X-Date and it’s coming sooner rather than later.
Most investors are ignoring this development and are assuming that Congress will strike a deal with the White House, raise the debt ceiling and make the X-Date go away (for now). Well, all I can say is don’t be so sure.
JPMorgan has actually convened a war room that will soon be meeting three times per day to deal with the fallout of the X-Date and the possibility of the U.S. missing principal and interest payments on U.S. government securities or possibly skimping on Social Security payments or other entitlements.
They’re obviously taking the X-Date seriously, even if investors aren’t.
Whether the X-Date arrives or not, investors should at least be prepared for the market turmoil that will arise as the impasse between Congress and the White House comes down to the wire.
The Bigger Picture
These are all short-term concerns. They’re important, but let’s zoom out toward the bigger fiscal challenges facing our nation…
Those who focus on the U.S. national debt (and I’m one of them) keep wondering how long this debt levitation act can go on.
The U.S. debt-to-GDP ratio is basically at the highest level in history (124%), with the exception of the immediate aftermath of the Second World War. At least in 1945, the U.S. had won the war and our economy dominated world output and production. Today, we have the debt — but without the global dominance we had in 1945.
The U.S. has always been willing to increase debt to fight and win a war, but the debt was promptly scaled down and contained once the war was over. Today, there is no war comparable to the great wars of American history, and yet the debt keeps growing.
Debt has been increased and decreased on a regular basis over the long period of American history. But never until today was there a view that the deficit didn’t matter, and that it could be increased indefinitely.
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