Senate Clears Last Major Hurdle to Raising Debt Ceiling The stalemate ended this week, when Senator Mitch McConnell, the Kentucky Republican and minority leader, cut a deal with leading Democrats on a convoluted process that would allow the borrowing cap to be raised on a simple majority vote. That way the measure could pass with only Democrats supporting it, rather than subjecting it to the 60-vote threshold that applies to most major legislation. _____________ Should be good for the markets unless there is a snag. Or a failed bond sale.
It is going to happen on the same day as Powell's speech that will not be named. VIX to 40, expect pain.
If the debt ceiling is not raised then VIX will be 40 or more. Other than that, just kick the can. If there is no taker for the debt, the Fed can keep them in its balance sheet.
so long as U.S. population grows and/or its inflation corrected GDP grows, the so called "debt", which isn't, will have to grow to prevent deflation. It will grow for the foreseeable future. The annual debt ceiling side show has no purpose other than to intentionally perpetuate ignorance of government finances. The United States, which does not borrow in another nations currency, has no debt. At least so far. The money to pay of the so-called debt has already been printed. What the U.S. calls "debt" is just an alternate, interest paying, form of the money already printed and spent into the economy. This alternate form of money --- Treasuries --- can be converted at will to the readily spendable, non-interest paying, form of money. Money printed in excess of growth in population/GDP minus losses, represents potential, future inflation.
The debt ceiling is a completely manufactured crisis that is used almost exclusively by Republicans to throw red meat to their rubes who don't understand what it means. Congress passes budgets and allocates spending, then they decide that..... because debt ceiling, they aren't going to pay those bills? Which is of course as absurd as you spending money on a house remodel, for example, then telling your contractor that even though you could easily borrow money to pay him and even though he's already done the work, you're not going to pay him and instead declare bankruptcy because you arbitrarily decided not to take on more than a certain amount of debt in a petty dispute with your spouse. And worse, you knew this when you hired him! Let me ask you, in what universe is the U.S. defaulting on debt it can easily pay of benefit to the citizens of the U.S.? Why would anyone with a modicum of intelligence ever advocate for such a thing? You want less spending, you spend less. You don't spend the money then voluntarily default on paying your debt in order to spend less money!
If the USA default on it's debt the VIX will spike into the HUNDREDS. Remember when it hit 80ish last year because the world went into a little shutdown mode? HAH! How about when the entire world, which is pegged to the USD, no longer has faith in the USD?
It is certain that the dollar will eventually lose its Reserve Status. It is only a matter of time. In the meantime our currency's reserve status gives us a tremendous advantage. We ought not to be too cavalier in our relations with other countries. We need friends, not enemies.
McConnell apparently thinks that the average American is pretty dumb when it comes to details of government money creation and financing. This is likely correct reasoning on his part from a purely political point of view. Certainly the average American doesn't understand that the U.S. has no debt. By incorrectly assuming government finances are just like their personal finances they will think that raising the "debt ceiling" is a bad thing. In reality, money financing for a nation like the U.S., that does not borrow in other nations' currencies, is very different from personal finances. The U.S. can create as much of its own fiat money as it deems necessary so long as it can continue to exercise deep sovereignty over this money. Nearly every American is convinced that when the U.S. Treasury auctions securities in the primary market, it is borrowing money because it it wants to spend more than its revenues will allow. Nothing, however, could be further from the truth. For one thing, unlike what you or I must do, The Treasury can spend long before it appears to be borrowing. U.S. Treasuries serve an entirely different roles than the raising of money. They are, for example, the means by which the Central Bank can exercise some control over the rate at which the readily spendable form of base money in the economy increases. And this of course bears on interest rates. And too, they serve as an interest paying store of money. There is only one, new base money creation step, and that occurs when the Central Bank covers a Treasury overdraft in the Treasuries reserve account. After new base money is spent into the economy, the treasury will issue Securities in the amounts of its net overdrafts, i.e., deficits. When these securities are purchased by primary dealers, private sector reserve accounts are debited. This reduces the amount of new base, or "outside", money in the economy in its readily and spendable form. Later, If the Central Bank deems it necessary to increase the amount of base money they can reverse this process by purchasing Treasuries on the secondary market which will cause private sector reserve accounts to be credited. This is the chief mechanism by which the Central Bank exercises control of the amount of non-interest paying base (or "outside" money) available in the economy. This money forms the seed for credit or "inside" money, which is the main contributor to the money supply. The C.B., of course, attempts to influence the amount of credit money via control of interest rates. But this is only weakly effective because the main factor determining the amount of credit is demand, and that the C.B. can influence that only indirectly unless they force interest rates to extremes. The C.B. always buy's Treasuries on the secondary market, because they want their purchases to register in private sector reserve accounts as opposed to the Treasury's reserve account. It appears that when the C.B. buys treasuries on the secondary market they are "printing" additional fiat money. But this is only an illusion, like the illusion of "borrowing" created by the Treasury's issuance of securities. One has to consider the Treasury and C.B. balance sheets side by side to understand fully why Treasury "borrowing" and C.B. "printing" when they buy Treasuries are both illusions. The C.B.'s illusionary "printing" has to do with the return of any revenue from maturing Treasuries on their balance sheet directly back to the Treasury. There is however real "printing", and that occurs when the C.B. covers net Treasury overdrafts. So long as the Congress persists in this purely political, crazy illusion of a "debt ceiling", enshrined in absurd statutory law, the "debt ceiling" will have to be raised of course if new money created and spent into the economy is to be matched to Treasury issues -- a very practical and useful procedure. By agreeing to let the debt ceiling raise go through the Senate with a simple majority vote McConnell can blame the Democrats. This is pure politics at its worst. The only responsible party here are the Democrats. But the average American is not going to understand that, and McConnell knows it. Every American should understand that the only way the total amount of base money in the the economy can be increased is via deficit spending. However the rate at which this new money is introduced into the economy can be too fast, and that's one place were bonds are useful. They are a tool of the Central Bank, but they do not represent real borrowing. Can the Congress cause too much new base money to be created and spent on the wrong things relative to the growth rate of the economy? Of course they can. And that can have undesirable consequences long after the politicians responsible have been forgotten. Of course politicians currently in office will invariably be blamed at the polls for those undesirable consequences.