May 9, 2023
We talked about the debt ceiling standoff, yesterday.
And we looked at the analogue of 2011.
As we know, 2011 resulted in a downgrade of U.S. debt by Standard and Poors.
One might expect a downgrade in the credit rating of U.S. Treasuries, what the world has known to be the safest, most liquid government bond market in the world, would result in capital flight.
It was just the opposite.
Money flowed into Treasuries. Prices went higher, yields went lower.
Why? Because it was still the safest, most liquid government bond market in the world. The U.S. stock market bottomed a few days after the downgrade. And so did the dollar. Relative safety. Relative value. Deep liquidity. Oh, and a central bank that was quick to launch another round of QE, just months after ending round one.
Now, in the current situation, the Treasury Secretary has self-defined a drop dead date on the debt ceiling, of June 1.
And the meeting today with the President and the Speaker of the House resulted in "no new movement." As we discussed yesterday, this standoff has as much, or more, to do with the policy path, as it does with debt levels.
The Speaker wants to slow the climate agenda spending/execution. And, at the very least, he wants to pull back the "$50-$60 billion of covid money" that has been left unspent.
We need spending to result in growth, not waste!
We need a hot growth, stable (but higher than average) inflation, and rising wages.
That's how we can grow out of a debt problem (as you can see below) – growing nominal GDP faster than debt.