US Debt Ceiling Looms

March holds a few of the larger known ‘elephants in the room’ for global sharemarkets – the Fed rate hike, the US debt ceiling and the Netherlands elections.  As of Friday night that became two with Yellen all but cementing a Fed hike happening on 15 March.  Markets seem to take it in their stride as it was already largely priced in.  Yet again gold held firm when such news would normally see it drop.  And let us stress, these are the known knowns, there are a plethora of known unknowns lingering too.

We discussed the Netherlands election last week so that leaves the US $20 trillion debt ceiling limit being hit on 15 March.  Whilst it is largely expected that Treasury Secretary Steven Mnuchin will enact “emergency measures” that could see the government survive until August by delaying the reinvestment of assets in various government pension funds plus some accounting shuffling tricks, it only delays the inevitable.   We’ve been down this road before but in 2011 it was strung out so long that Standard & Poor’s downgraded the government’s Triple-A credit rating after Congress and the White House deadlocked for weeks negotiating a budget deal, and the Treasury came within a whisker of defaulting.  Gold and silver rallied strongly. 

The lead up to next Wednesday’s deadline is looking scary and the graph below is one you should take special not of.  The IRS is in the process of paying out tax returns at this critical juncture meaning cash reserves are being drained just before they may be drastically needed.

David Stockman, the ex Reagan administration budget director who we spoke of last week, had this to say recently about this situation:

“I think what people are missing is this date, March 15th 2017.  That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015.  That holiday expires.  The debt ceiling will freeze in at $20 trillion.  It will then be law.  It will be a hard stop.  The Treasury will have roughly $200 billion in cash.  We are burning cash at a $75 billion a month rate.  By summer, they will be out of cash. 

Then we will be in the mother of all debt ceiling crises.  Everything will grind to a halt.  I think we will have a government shutdown.  There will not be Obama Care repeal and replace.  There will be no tax cut.  There will be no infrastructure stimulus.  There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.”