US debt ceiling crisis looms
On Capitol Hill, the debt ceiling issue is causing huge problems. The concept of the debt ceiling was first established through the Second Liberty Bond Act of 1917 but then formally enshrined in the Public Debt Acts of 1939 and 1941 so that every now and then Congress is called upon to raise it. Since 1958, the Federal budget has only on four occasions been in surplus. In 1969, it crept to a modest positive of US$ 3 bn and then again during the four years of Bill Clinton’s second term it was successively driven into the black – am I allowed to say that? – by US$ 69 bn, US$ 126 bn, US$ 236 bn and US$ 128 bn respectively. To put that in context, the 2021 deficit was US$ 3.132 trn and that of last year US$ 2.772 trn. In terms of deficit to GDP, that reads 15% and 12.1%.
Should we therefore be questioning whether those who want to raise the debt ceiling willy-nilly are more mad or those, the Republicans, who are standing in the way and demanding the imposition of some desperately needed spending discipline? During the Trump presidency, as unsavoury as most non-Americans and of course many Americans too thought it to be, the Democrats threw every stick they had into the spokes of government. And now with the houses split, albeit the other way around since the midterm elections, the shoe is on the other foot. I remember wondering at the beginning of Joe Biden’s presidency how he would cope with adapting his rather 1970s and 1980s Swedish- or German-inspired social democratic ideology to the 2020s. The answer is that he has not.
Winston Churchill coined the phrase that trying to tax oneself into prosperity is like standing in a bucket and trying to lift oneself up by the handle. The same, no doubt, goes for spending. The Keynesian concept of government providing the spark that ignites the economy, call it the starter motor, is one thing. Relying on government spending to persistently drive growth is another. Yes, Biden’s green initiatives for example look very laudable but are they starter motor or motor? The Democrats argue for the former, the Republicans for the latter. The debate over out of control Federal spending needs to be had. Sadly in the context of ever more polarised politics in Washington, the run-up to a debt ceiling increase seems to be the only time when it can be conducted and in the words of Treasury Secretary Janet Yellen, the politicians are holding a gun to the head of the American people.
Yellen has been quite vociferous and has called the probable consequences of a government default “catastrophic” at the same time as appealing to business leaders to get on their bikes, get their buts to Washington and to make clear to the political classes what size of fire they are playing with. I have lived through countless debt-ceiling increases – alone 23 since the turn of the century – and quite a few of them have been similarly contested to the current one. Thus, one cannot but conclude that one way or the other a solution will be found. That said, markets are not trading as though it were a slam-dunk and a done deal.
One of my first essays as an undergraduate Politics student was on the subject of centripetal politics. This was the 1970s and the assumption was that the ratchet was to the left and that all sides, left and right, would somehow eventually congregate in the social democratic middle ground. They were not entirely wrong. But now we are experiencing a centrifugal effect with red and green politics – or blue in the USA – going one way and blue and black – or red in America – going the other. Consensus politics is on life support.
Against the backdrop of this increasingly irrational ideological slug-fest, changing geopolitical currents aside, investors are supposed to take rational decisions. The central banks had during the GFC in some respects taken over as centres of rational thinking. Central bankers in the cut of Ben Bernanke, Mario Draghi and, although not in my book, Mark Carney were seen as the cool heads who would take care of the economy and by extension citizens’ material wellbeing whilst the politicians were busily learning how to use Twitter to be rude to one another. The likes of Draghi’s legendary “..whatever it takes…” was the guarantee that all’s well that ends well, irrespective of which party is or parties are in power. But now “…whatever it takes…” is no longer about lower rates but about higher ones and that is not to most people’s liking. Suddenly the central banks are no longer everybody’s best friend.
The US regional banking crisis refuses to lie down and after the grand stock market rally of Friday on the back of unexpectedly strong payroll numbers – no, there is no recession waiting to bite – the prospect of the tightening cycle maybe not being quite as over as most had thought is once again peeping its head over the parapet. Falling corporate earnings and rising unemployment might push the central banks to pause and even shift to an easing bias but as I saw one strategist write, investors should be very careful of what they wish for.
In terms of marbles being lost, the increasing probability of a Biden/Trump Mk II must be looked at from Beijing with increasing bemusement. When one reads more deeply into the early 1960s and the fraught relationship between the Kennedy White House and the military, one finds a war hero in the Oval Office. JFK might have only been a lieutenant in the USNR but he did stand up to his generals and admirals and never forgave them for having lied to him with respect threats and necessary countermeasures. He knew he had been railroaded into the Bay of Pigs but he also knew where the buck stopped. During the Cuban Missile Crisis he took command.
Does Beijing really need to occupy Taiwan or does it simply patiently wait until being part of the Chinese block becomes economically more attractive than being part of the American one? Since Commander Perry sailed into Edo Bay in 1853, thus establishing American gunboat diplomacy, Washington has spoken softly but carried a big stick. It had during the First Cold War served us well. With just 5% of the world’s population but a quarter of its firepower, it has dominated the political and economic narrative. China has 20% of the population and at this moment in time still significantly less firepower. But it has time. America’s growing social and political polarisation is, gunboats or no gunboats, depriving it of authority.
The Coronation has brought with it a wide discussion on rich and poor and on privilege and deprivation. Without formal evidence, however, I would venture to guess that the spread between rich and poor and the numbers involved are much less acute in America and Europe than they are in China, India or other parts of Asia and most certainly in most of Africa. Wealth in the West, as unequitable as it might appear, is surely less unevenly distributed than elsewhere in the world. I digress.
This morning saw the release of China’s April trade figures. Its dollar trade surplus widened from US$ 88.19 billion to US$ 90.21 billion in April versus a forecast of US$ 71.60 billion. Significantly, imports tumbled by 7.9% year-over-year versus a 1.4% fall in March. Exports rose by 8.5% versus 14.8% in March. Economists had by consensus forecast imports to decline by 5.0% and exports to increase by 8.0%. This is an uncomfortable number for those who have been looking to China to be the locomotive pulling the global economic growth train. Manufacturing figures are not exactly sparkling and maybe the anticipated post-Covid consumer boom is not going to be what many had both hoped for and expected.
With the Fed and the ECB having done their bit last week, there remains the Bank of England’s MPC meeting on Thursday. It is astonishing that there are still some out there who are prepared to bet on its deciding to pause its tightening cycle. At 4 ¼% Bank Rate is well behind the inflation curve and although most of the current damage is being done in food prices, all items CPI is still an embarrassing 8.9%. Energy cost are, however, falling sharply and I was most pleased to have just done a bit of an oil top-up at 57 pence/litre before VAT. I am not a gas user – other than in the barbecue – but I note that Dutch TTF Gas is now trading at €37.00 as opposed to its high in August of over € 308.00. The NYMEX equivalent is at US$ 2.22 having peaked in August at US$ 9.68. Average citizens don’t care for the core inflation rate as not many of them are out there buying iPhones and new cars but spend most of their money on food and energy.
Alas, once again we here in the UK trot into a new week with one day’s delay. The Coronation weekend has been splendid with all the pomp and circumstance of the show at Westminster Abbey and in the streets of Westminster. To me the absolute highlight was the Andrew Lloyd Webber Coronation Anthem which was performed towards the end of the Coronation. If you missed it, do go back and have a listen. Sunday was the done for local events and after days of misery and rain the sun came out and graced us with an absolute cracker. I also did my bit for the village at our event on the back of which I shall never again be disdainful towards those legendary hamburger flippers. I think I did over 200 with my own fair hand. Brilliant sunshine all day Sunday and a big party in the meadow behind the village hall; by yesterday morning it was again wet and miserable as it is this morning. I can’t remember the last time we had more than two consecutive days of blue skies. Deeply depressing and only 43 day to go until the Summer Solstice. Yikes!
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