Secretary Yellen to Speaker McCarthy: "unable to continue to satisfy all of the government’s obligations by early June" - InvestingChannel

Secretary Yellen to Speaker McCarthy: “unable to continue to satisfy all of the government’s obligations by early June”

From Treasury Secretary Janet Yellen to Speaker McCarthy:

“After reviewing recent federal tax receipts, our best estimate is
that we will be unable to continue to satisfy all of the government’s obligations by early June,
and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that
time.”

The following is relevant today. 

From Federal Reserve Staff in 2013 on the debt ceiling debate: Possible Macroeconomic Effects of a Temporary Federal Debt Default. Excerpts:

Key considerations in evaluating the consequences of a debt default

Such an event would be unprecedented. Although other countries have defaulted on their
sovereign debt, these defaults occurred in situations where the government could not feasibly
continue to service its debt. Failure to raise the U.S. federal debt ceiling, in contrast, would
be a voluntary decision to stop meeting the government’s obligations even though it has no
problems doing so
. In addition, no other nation that defaulted on its sovereign debt ever
enjoyed two key features of the U.S. economy—Treasury securities are the world’s “safe”
asset and the dollar is the world’s main reserve currency. For these reasons, we have
essentially no historical experience to help us predict the likely consequences of a failure by
the Congress and the Administration to raise the debt ceiling.

The financial market effects of a debt default would be highly uncertain, both because of its
unprecedented nature, and because (as events in recent years have illustrated) we have only a
limited understanding of the dynamics of the financial system when hit with a major shock.

o Yields on Treasury securities could rise noticeably, even if the default lasted only a day
or two. And if the debt limit impasse dragged on for weeks, it could conceivably lead
investors to demand a premium similar to that paid on AAA corporate bonds.

o Given that Treasury yields serve as a benchmark rate for the pricing of other securities,
and given that a prolonged stand-off would probably make the general economic outlook
much more uncertain, private interest rates could rise sharply. Rising interest rates and
risk premiums would in turn push stock prices down appreciably
.

o In some extreme scenarios with a prolonged default, financial markets could be severely
impaired. For example, the functioning of the repo market could be compromised and
some money market mutual funds could experience liquidity pressures.

o A debt default could also have some international repercussions. For example, a
prolonged default might increase the reluctance of investors to hold Treasury securities
and perhaps dollar-denominated assets more generally. Although the resulting
rebalancing in portfolios might be relatively gradual, it could lead to a decline in the dollar over time (although a sudden drop could not be ruled out) and a higher “country-risk” premium on all U.S. assets.

• A debt default would also adversely affect the economy through its direct effects on
aggregate income flows and government operations if the impasse in raising the debt limit
lasted for several weeks.

o Currently, an extremely large portion of federal government spending is funded through
borrowing (in part because tax payments are concentrated in other months). From mid-October through mid-November, for example, only 65 percent of projected spending
would be covered by revenues. Thus, 35 percent of government cash outlays would
need to be cut if a debt limit accord was not reached until the middle of November.

o Assuming that the Treasury prioritizes its payments to cover all scheduled net interest
payments, other federal spending would be temporarily reduced by the following
amounts
(expressed in nominal terms at an annual rate): $340 billion in nominal federal
purchases; $630 billion in Social Security, Medicare, and other transfer payments; and
$150 billion in grants to state and local governments.
emphasis added

Usually the debt ceiling (I prefer “default ceiling”) is raised with a clean bill. It is up to Congress. As Senator Mitch McConnell noted in 2011, if the debt ceiling isn’t raised the “Republican brand” would become toxic and synonymous with fiscal irresponsibility.

Related posts

Advisors in Focus- January 6, 2021

Gavin Maguire

Advisors in Focus- February 15, 2021

Gavin Maguire

Advisors in Focus- February 22, 2021

Gavin Maguire

Advisors in Focus- February 28, 2021

Gavin Maguire

Advisors in Focus- March 18, 2021

Gavin Maguire

Advisors in Focus- March 21, 2021

Gavin Maguire