Debt Deal in Doubt But Not Really

And there remains zero chance of actual default.

May 30, 2023

First, no surprise here: Yammering Yellen now says that the US clearly has enough money in its bank account to make it to June 5th, still paying its bills. While much was made of her earlier statements that the money could run out as soon as June 1, you may remember me saying here that you could be certain that she had fully hedged her projected “D-Day” (debt day, as I was calling it) to where she’d be able to move it out if need be. So, magically, over the weekend it got pushed further off.

In fact, look at her language today, and you’ll see it is still well hedged. She does not say the US will likely “run out of money” to pay its bills on June 5th. She says it has enough to be sure of paying its bills until then. It is only by (wrong) inference once could conclude it might run out immediately after that. So, as June 5th approaches, Yanet can readily say, “And it looks like things have been going well enough with revenue that we will continue to have enough until, at least, June 10th” in order to keep credit markets calm. She can do that without contradicting any of her statements to date.

Even the June 1 “hard deadline” she stated was really a very soft deadline of “sometime between June 1 and June 15,” but all financial writers fastened on her earliest date in that stated range as if that was the number, when clearly it was not. My own claim was that the shorter side of that range was just the Treasurer’s way of supporting her president by pressuring a deal. What she really meant was “The very earliest we could possibly run out of money would be June 1.”

As I also said repeatedly last week, there has always been ZERO risk of the US government not paying its debt, even if the debt ceiling is not raised for months. ZERO! That is because the government has the full right and ability and CONSTITUTIONAL MANDATE to prioritize payments and pay the debt interest first because it must not be questioned based on the 14th amendment, while the ceiling imposes no limit in rolling over old debt, just on taking out additional debt.

So, the only way the US could actually default would be if Biden chose to ignore this constitutional mandate. He simply wanted to keep potential abuse of the 14th Amendment in his pocket as if it mandates he exceed the debt ceiling if he has to, rather than as a mandate to prioritize expenses and shut down numerous government operations in order to stay under the ceiling and still honor the US debt. The only way default could happen would be if Biden defied the constitution and forced US debt payments to the bottom tier of US bills that are due, which would make him solely responsible for destroying the US financially as shutting down the government has always been an option and has been done before.

In today’s headlines, you’ll also read all kinds of kerfuffle about whether or not McCarthy and Biden can get a majority of their party’s vote to pass the agreement they struck over the weekend. That, too, is much ado about nothing because neither one needs a much of a majority of their party to go along with the deal. It is highly unlikely that Biden will not get a large majority of his party to agree versus shut down government. It is highly unlikely that McCarthy won’t get the least stringent parts of his party to agree. All each needs is barely over half of their party to go along with their party’s leader in order to achieve a bipartisan majority of congress. So, they’ll pass it and moan about how it was a bad deal.

Several alrticles are also noting that the house committee must move the bill forward for a full vote and three of nine Republicans on the committee will oppose McCarthy, possibly four. The articles say that, if the 4th Republican swinging in the wind, refuses that will kill the deal, but I don’t know how they get to that math because I find it hard to believe the four Democrats will all vote against a bipartisan deal their president badly wants passed, making themselves responsible for the possible shutdown of government. The articles talk as if there is no way the Dems on the committee will vote for the bill so that McCarthy must get a majority of his Repubs to vote for it, or it will fail. I doubt it. That seems like weird math to me. If you have four Democrats who vote for it and the five Republicans who do not appear to be against it voting for it, that’s 9-4 in favor. That leaves room for a victory, even if half the Dems on the committee go against their own president.

If they do fail to get it passed, credit agencies will not give them more time and will downgrade US credit even without a default, which could cause a lot of turmoil. As I was also pointing out last week, another real risk, even if the deal does pass, as I think is the more likely bet here, is that the long delay in passing an agreement on the debt ceiling means a massive amount of debt funding has to begin as soon as it passes. While the Treasury will stretch that fundraising out as much as it can, it can’t stretch it much. (That is assuming Yellen’s brain is bigger than half a walnut.) That sudden huge increase in bond supply will roil bond markets, raise yields, and compete against stocks.

So, while the stock market may see a relief rally, it will be short lived because things will get messy as soon as the government starts seriously raising capital to make up for a great deal of lost time in a market where the Fed is constrained by sticky inflation from becoming a buyer again. Right now, the stock market, in spite of recent stock gains, is looking weaker. Almost all the gains have come from hyped-up AI related stocks. Other than big gains in these few companies, the rest of stocks have been falling, showing bottom support is falling out of the market.

(Headlines related to this editorial are in boldface type below.)