Forex Market Commentaries - Debt Raise Poker Game

"I'll See That Debt Raise And I'll Raise You" The USA Continues With Its High Stakes Poker Game

Dec 28 • Market Commentaries • 2250 Views • Comments Off on "I'll See That Debt Raise And I'll Raise You" The USA Continues With Its High Stakes Poker Game

Amongst the ‘good news’ regarding consumer optimism that was reported on Tuesday came the very bad news (which appeared to be buried) that the USA was close to breaching the first level of it’s revised debt ceiling agreed by both houses in the USA Congress back in late July, early August 2011. We’ll comment on consumer confidence and house prices towards the end of this commentary, but for now let’s take a quick look at the debt ceiling issue.

The USA admin/govt borrows approx 40% of the money it needs to simply function on a day to day basis, a desperate state of affairs brought on by the steadfast and resolute obstinacy of either of the two parties to increase taxes over successive decades. The USA govt. has managed to burn through the revised debt ceiling inside five months, in short it has spent roughly an extra $220 billion per month since the revised debt ceiling was introduced. Now apologists for the USA admin will state that, “it’s under control, there’s nothing to see here, just move along Sir”, however, despite the calm and the argument that raising it was subject to certain criteria being met and it was all part of the programme, the situation is dire.

The Republican party pretended to play hard ball on the issue back in July/August, but the tub thumping was for the gallery, if they hadn’t raised it then the wealthiest amongst the Capitol Hill cabal would have been first in the firing line to witness a significant part of their paper wealth evaporate. When S&P downgraded the USA rating as a consequence of the debt raise on August 5th, (the first time in ‘rating agency history’ the USA had ever been downgraded), the Dow Jones index fell by 5.6% on the day, the fall in the equities markets, had the USA gone into lock down, would have been catastrophic.

Late on the night of July 31, President Obama and Congressional leaders of both parties announced an agreement that would raise the debt ceiling by up to $2.4 trillion in two stages, enough to keep borrowing into 2013. The pact called for at least $2.4 trillion in spending cuts over 10 years, with $900 billion in across the board cuts to be enacted immediately. And here’s the ‘rub’; the current ceiling has been breached very early, the next tranche of $1.2 trillion (on current projections) will only last until May at the latest, not August 2013 and once that extra cash is burned through the USA will have a debt versus GDP ratio of 110%. That’s a creeping ratio in the same ball park of the PIIGS nations in Europe – those who the USA admin. attempt to lecture with regards to fiscal prudence and monetary control. There really is no comparison given the sheer size of the USA debt, the USA is (and always was) the mammoth cryogenically suspended in the deep freeze if Europe was the elephant in the room..

Here’s a snapshot of the debt ceiling;

The United States debt-ceiling crisis was a financial crisis in 2011 that started as a debate in the United States Congress about increasing the debt ceiling. The immediate crisis ended when a complex deal was reached that raised the debt ceiling and reduced future government spending. However, similar debates are anticipated for the 2012 and 2013 budget.

As of May 2011, approximately 40 percent of US government spending relied on borrowed money. Raising the debt ceiling allows the federal government to continue to borrow money to support current spending levels. If the debt ceiling had not been raised, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government, besides the impact on the domestic and international economies. Treasury can determine what items would be paid. If the interest payments on the national debt are not made, the US would be in default, potentially causing catastrophic economic consequences for the US and the wider world as well. (Effects outside the US would be likely because the United States is a major trading partner with many countries. Other major world powers who hold its debt could demand repayment.)


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According to the Treasury, “failing to increase the debt limit would “cause the government to default on its legal obligations an unprecedented event in American history”. These legal obligations include paying Social Security and Medicare benefits, military salaries, interest on the debt, and many other items. Making the promised payments of the principal and interest of US treasury securities on time ensures that the nation does not default on its sovereign debt. Prior to the debt ceiling crisis of 2011, the debt ceiling was last raised on February 12, 2010 to $14.294 trillion.

On April 15, 2011, Congress passed the last part of the 2011 United States federal budget, authorising federal government spending for the remainder of the 2011 fiscal year, which ends on September 30, 2011. For the 2011 fiscal year, expenditure was estimated at $3.82 trillion, with expected revenues of $2.17 trillion, leaving a deficit of circa $1.48 trillion. According to Treasury, the US government would run out of cash to pay all its bills on August 2, 2011, which became the deadline for Congress to vote to increase the debt ceiling.

Consumers Confident In The USA

Two reports published on Tuesday, highlighting the overall levels of sentiment in the USA, appeared to be on the face it rather contradictory, however, closer inspection revealed why…

The Case Schiller housing report in the USA is accepted as the most respected house price metric published. Despite record low mortgage rates the index dropped by 1.1% month on month. From the peak of house price mania in 2006 the fall is now at circa 37% from peak to trough and many analysts are pencilling in further falls in 2012. The irony that only now are banks, who repossessed with such pathological vigour since 2007, now looking to create mass tenancies in many of the circa six million properties they repossessed is truly an epic ‘face palm’ moment. Had they engineered a plan with original owners, perhaps with a little debt forgiveness, then the rescue of USA banks wouldn’t have been so gargantuan and the USA homeless figures wouldn’t have spiked to over 1.5 ml during 2011..

And finally if you’re going to conduct a survey on shoppers optimism you may get a slightly false reading if you stick a clip board or microphone under someone’s nose after they’re all giddy and light headed due to competing with the throngs in the sale which comes after Xmas, but before the New Year sale. Questions such as “how optimistic and confident do you feel about the future of the USA economy?” when the respondent is laden like a Buckaroo mule, with as much baggage as possible before snapping, is bound to be greeted with a ” hey man, life is wonderful, I just got this toaster for $3, don’t need it but hey, god bless American consumerism, it accounts for seventy percent of our economy right? ”

And that consumerist optimism isn’t shared by the huge retail firm Sears in the USA who have announced that they’re closing up to 120 stores after a disappointing season. That metric has far more credence than a survey given that Sears owns the K mart brand in the USA..

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