It is sobering to think that the US federal government was running a large budget surplus in 2000 and the gross debt ratio was 54pc of GDP.

A quarter of a century later the ratio is 120pc and vaulting past the 1945 peak. This is partly due to two big recessions and Covid, to be sure, but mostly due to three sets of unfunded tax cuts, two unfunded 21st-century wars and no serious effort to control ballooning middle-class entitlements.

David Kelly from JP Morgan says the US is looking at annual fiscal deficits of $2 trillion this year, next year, and as far as the eye can see. This is at a time of effectively full employment and what should be bumper tax revenues. The deficit could hit $3.5 trillion in the next downturn.

The US Treasury must roll over $8 trillion of existing debt and raise $2 trillion of fresh debt this fiscal year, even as the Fed tosses another $1 trillion onto the heap under its QT programme.

Investors have belatedly, and suddenly, woken up to the shocking implications of a structural budget deficit heading for 8pc of GDP even before any trouble starts. It is this that has driven up yields on US Treasuries by 100 basis points since July.

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If rates continue to rise the way that they’ve been rising, eventually there’s going to be a financial accident, eventually something will break, said JP Morgan’s David Lebovitz on Bloomberg Surveillance. https://t.co/ZsQ8NfcD3n must-read. we thank AEP & David Lebovitz @jpmorgan

— tom keene (@tomkeene) October 7, 2023

Republicans, who have newly taken control of the House of Representatives, say that they cannot abide runaway spending and must rein it in. This deep concern appears episodic. When Donald Trump was president, the debt ceiling was increased three times with Republican support, and the national debt rose by $8trn over his term ($3.2trn of which came before covid-induced spending began in 2020). Those increases were not particularly contentious, and the White House wishes the same for this one. “Raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” Mr Biden’s press secretary said in a statement released on January 20th.

But it may not be so simple. Republicans are unlikely to let their leverage over Mr Biden lapse. Kevin McCarthy squeaked into his position of Republican speaker of the House by promising many concessions to hardliners, including pledging extreme brinkmanship over the debt ceiling. Mr McCarthy has vowed to secure spending cuts in exchange for raising the debt limit, and pledged to put the country on the path to a balanced budget in a decade. As part of his bargain to attain power, the beleaguered speaker also had to allow a parliamentary manoeuvre that would make his own removal easier. Mr McCarthy may not be able to keep his promises, in which case his own party could end his speakership in its first year.

This is forcing financiers, lawyers and officials to focus on the unthinkable. The starting point of such contingency planning is that a sovereign default would be cataclysmic: in all likelihood stocks would plunge, borrowing costs would soar, growth would suffer and the dollar’s status as the world’s dominant currency would be shaken. Any way to avoid this series of disasters merits attention. The problem, unfortunately, is that each proposed workaround has severe—and quite possibly unworkable—drawbacks.

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Most games of chicken do not have trillion-dollar stakes. But such a spectacle is common in America https://t.co/18TkzGkAnt

— The Economist (@TheEconomist) January 23, 2023

America’s gross national debt topped $30 trillion for the first time on Tuesday, an ominous fiscal milestone that underscores the fragile nature of the country’s long-term economic health as it grapples with soaring prices and the prospect of higher interest rates.

The breach of that threshold, which was revealed in new Treasury Department figures, arrived years earlier than previously projected as a result of trillions in federal spending that the United States has deployed to combat the pandemic. That $5 trillion, which funded expanded jobless benefits, financial support for small businesses and stimulus payments, was financed with borrowed money.

The borrowing binge, which many economists viewed as necessary to help the United States recover from the pandemic, has left the nation with a debt burden so large that the government would need to spend an amount larger than America’s entire annual economy in order to pay it off.

Some economists contend that the nation’s large debt load is not unhealthy given that the economy is growing, interest rates are low and investors are still willing to buy U.S. Treasury securities, which gives them safe assets to help manage their financial risk. Those securities allow the government to borrow money relatively cheaply and use it to invest in the economy.

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Breaking News: The U.S. national debt topped $30 trillion, years ahead of schedule, as pandemic spending fueled government borrowing. https://t.co/6yUwsPvi1P

— The New York Times (@nytimes) February 1, 2022

Treasury Secretary Jacob J. Lew warned Congress on Wednesday that the government would most likely exhaust its ability to borrow in late February, setting up yet another fiscal showdown with Republicans, and this time earlier than congressional leaders had anticipated.

In a letter to Speaker John A. Boehner and the other top three congressional leaders, Mr. Lew said a surge of February spending, mainly tax refunds for 2013, would leave the Treasury with little room to maneuver after the official debt limit is reached on Feb. 7.

The letter amounts to an early alarm bell, coming just weeks after Congress passed its first bipartisan budget and comprehensive spending bill in years. Those bills were supposed to serve as a cease-fire in the budget wars that have rattled the country and the economy since Republicans took control of the House in 2011.

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Standard & Poor’s is only raising half a cheer at the deal:

“We believe that to date, the shutdown has shaved at least 0.6 per cent off of annualised fourth-quarter 2013 GDP growth, or taken $24bn out of the economy.

“The short turnround for politicians to negotiate some sort of lasting deal will probably weigh on consumer confidence, especially among government workers that were furloughed. If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their cheque books. That points to another Humbug holiday season.”

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Understanding the developing attitude of the central banks, and the effects of their actions, obviously remains central for investors in all financial assets. The “big picture” for global financial assets, involving very low government bond yields and a gradual shift of risk appetite into credit and equities, is unlikely to change until one of two events takes place.

The first would be a decision by the central bankers themselves that the era of unlimited quantitative easing must end, either because of the risk of inflation and asset price bubbles, or because of concerns about fiscal dominance over the monetary authorities. The second would be a realisation by the markets that further action by the central bankers is irrelevant because they have run out of effective ammunition. Either of these events would probably remove the central prop from the equity bull market which began in March, 2009, but neither seems very likely in 2013.

There is certainly no sign that the central bankers themselves will call a halt to the extension of their balance sheets.

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Standard & Poor’s downgraded the credit ratings of France, Italy and seven other European countries on Friday, a move that may have more symbolic than fundamental financial impact but served as a reminder that Europe’s economic woes were far from over.

Another memory jog came Friday from Greece, the original source of Europe’s debt troubles. Talks hit a snag between the new Greek government and the banks and other private investors that Athens hopes will agree to take losses on their debt so that Greece can avoid a default.

Together, those developments underscore that even as Europe’s debt turmoil enters its third year, no clear solutions are yet in sight ”” despite recent signs that a new lending program by the European Central Bank might be easing financial market pressures.

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The Congressional Budget Office on Tuesday downgraded its estimate of the benefits of President Obama’s 2009 stimulus package, saying it may have sustained as few as 700,000 jobs at its peak last year and that over the long run it will actually be a net drag on the economy.

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The crisis of the euro zone has finally hit the potholed road of real politics, with the Greeks now openly questioning whether their commitment to Europe and its single currency still matters more to them than control over their own future and economic well-being.

During the two-year financial crisis, the wealthier countries of northern Europe, led by Germany, have insisted that their heavily indebted brethren in the south radically cut spending in return for emergency loans. They have stuck to that prescription even though austerity has undermined growth and increased unemployment in Greece, Spain, Portugal and now Italy, betting that people in those countries will swallow the harsh medicine because their only alternative is to default and possibly leave the euro zone altogether.

The turmoil in the government of Prime Minister George A. Papandreou means that Greece is about to call that bet. Many Greek politicians appear to be calculating, at this late stage, that they have more to lose by sticking to Germany’s terms than by risking a messy default, and even going it alone with their old currency, the drachma, outside the euro zone.

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Financial turmoil in global markets continues to play havoc with the value of the U.S. dollar, but technology continues to make the transfer of donor dollars to missionaries quicker and easier.

American missionary income in China has dropped 25 percent in recent years because of the dollar’s decline against the Chinese yuan, said a missionary leader who requested anonymity. “In 24 years of missionary ministry, I have never seen things as tough as they are now.”

“It’s a complaint we hear almost every day,” says Bill Bray of Christian Aid Mission, which supports indigenous missionaries in 122 nations. “They need more money because of the exchange rate.”

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The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts.

The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday.

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We’re just stuck?

If we don’t deal with it ”“ if we don’t proactively say we’re going to get our deficit under control ”“let me put it this way: My personal belief is that if we do proactively get our long-term budget issues under control, the bond market will say, “Okay, you’re credible and we will buy your bonds, because you have put yourself on a credible path ”“ whether it’s through cuts, whether it’s through tax increases, however you want to do it ”“ but you have to do it. But you have shown us a credible way to get to the place where the growth rate of your deficit is below the growth rate of nominal GDP.”

But if we don’t do that, my wine bottle of pain becomes a jeroboam and we end up downing it all at once.

That sounds ugly.

It is. It will force budget cuts; it will force tax increases of the magnitude that no one is ready to contemplate. We’re talking cuts in Medicare, cuts in education, in defense, in spending of all kinds. That would create a depression, a true depression that would last 4-5 years, push unemployment to 20%-25%….

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This year, volatility has soared and share prices have fallen sharply, in part because few believe there is a Bernanke put, or, for that matter, a Trichet put. It is far from clear that the authorities could stem a new panic, and even less clear that many would be willing to try.

In other words, the slogan for markets as the International Monetary Fund and World Bank meet this week in Washington could well be, “You’re on your own. Don’t count on anybody to bail you out.”

The situation is thus drastically different from that of three years ago, when I.M.F.-World Bank meetings served as a forum to find joint strategies to ameliorate the financial crisis that had followed the collapse of Lehman Brothers.

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The Joint Select Committee on Deficit Reduction, aka super Congress or super committee, is Congress’s answer to its own inability to break the hold of partisan gridlock that took America to the brink of default on Aug. 2, prompting the first-ever downgrade of the nation’s credit rating.

The panel, which on Thursday holds an organizational meeting open to the public, has a sweeping mandate to propose cuts to spending and entitlements and recommend tax reform by Nov. 23. Congress must vote the package up or down ”“ no amendments or filibuster ”“ by Dec. 23, or trigger a $1.2 trillion package of automatic spending cuts, equally divided between defense and domestic spending.

“Never has Washington had an all-or-nothing panel that is empowered and backed by a firm timeline like this one is,” says John Ullyot, a public-affairs consultant in Washington and former GOP Senate staffer. “The starter pistol will fire right after Labor Day.”

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In this year’s speech, he is likely to put particular emphasis on what needs to be done to repair the U.S. economy over the longer run, including lowering long-term deficits. The title of the speech, in fact, is “Near- and Long-Term Prospects for the U.S. Economy.”

While Bernanke has said that Congress should not cut the budget deficit too quickly, lest this austerity undermine the weak economic recovery, he has previously argued that a long-term plan to put the government’s spending in line with its revenue could help instill confidence. Indeed, Deutsche Bank chief economist Peter Hooper said in a research note that the need for longer-term adjustments in the economy could be another argument against new Fed intervention.

“Any action the Fed takes at this point may give the markets no more than a temporary lift and would not resolve the more fundamental problems that are weighing on the economy,” Hooper said.

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Take a look.

The nation’s Roman Catholic bishops are urging the GOP-led House to reject a cuts-only approach to the budget as Washington tries to avert an unprecedented government default on its multi-trillion-dollar debts.

“A just framework for future budgets cannot rely on disproportionate cuts in essential services to poor persons,” wrote Bishop Stephen Blaire of Stockton, Calif., and Bishop Howard Hubbard of Albany, N.Y., in a Tuesday (July 26) letter to House members.

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Should America embark on such fiscal contraction at a time when economic growth has already slipped to stall speed, and debt deleveraging continues with a vengeance, I would like to flee to Mars for safety.

Yes, there is such a concept as an “expansionary fiscal contraction”, as in Ireland (1980s), Denmark (1990s), arguably Canada (1990s), and the UK after both 1932 and 1993, but in every successful case this was accompanied by monetary loosening. That card has already been played this time.

Should America instead opt to evade these fiscal cuts by actually defaulting on debts accumulated by self-indulgent baby boomers, I would also like to flee Mars because such an outcome might be even worse.

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House and Senate negotiators have not reached a deal that would lift the nation’s debt ceiling just hours before markets in Asia are set to open ”” a test of whether Washington political dysfunction is beginning to shake the global economy.

House Republicans are not able to reach a deal with Senate Democrats, said congressional sources, though staff-level negotiations are continuing.

And in a sign that talks with Republicans appear to be going sour, Senate Majority Leader Harry Reid (D-Nev.) began to draft his own legislation Sunday that would slash at least $2.5 trillion to match an extension of the nation’s borrowing limit through the 2012 election, leadership aides said.

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This medicine is very hard for Americans to swallow, but the truth is, we can’t have it both ways. We want an arms-length relationship with the government in good times. In bad times, the cries go out to “do something,” even if it’s pay us to do nothing. We want a free-market economy during expansions, a nanny state in periods of recession. Privatized profits during the boom, socialized losses during the bust.

–Caroline Baum, in a Bloomberg News piece this week

For years now, America has been spending more money than we take in. The result is that we have too much debt on our nation’s credit card ”” debt that will ultimately weaken our economy, lead to higher interest rates for all Americans, and leave us unable to invest in things like education, or protect vital programs like Medicare.

Neither party is blameless for the decisions that led to this debt, but both parties have a responsibility to come together and solve the problem. That’s what the American people expect of us. Every day, families are figuring out how to stretch their paychecks a little further, sacrifice what they can’t afford, and budget only for what’s truly important. It’s time for Washington to do the same.

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It’s not that Republicans needed to tug their forelock and go along with whatever grand bargain the White House whipped up. But to win the endgame, they needed something they were willing to concede, something they could tout in public as an example of meeting the Democrats partway.

Their inability to make even symbolic concessions has turned a winning hand into a losing one. A majority of Americans want to close the deficit primarily with spending cuts ”” which is to say, they’re primed to side with conservatives in the debt-ceiling debate. But in trying to turn that “primarily” into a “completely,” the right has squandered this advantage….

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In February, President Obama submitted his budget. The CBO reported that it would steeply boost the national debt.

In April, the president released a revised deficit-reduction plan so short on detail that the CBO deemed it too vague to evaluate.

Also in April, the Senate unanimously rejected the president’s February budget. Since then, the Democratic leadership in the Senate and the White House have put forward no clear budget approach….

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…a quick, informal selection of voices from across the country over the weekend found both pessimism and cynicism about the state of negotiations in Washington, resignation about the partisan jousting and more confusion than conniption about what exactly will happen if the president and his Republican opponents cannot make a deal to raise the debt ceiling by Aug. 2.

And neither side, they say, looks good.

“They’re all boneheads,” said Steve Ruzika, 55, an entrepreneur from Boca Raton, Fla., who added that while he is politically conservative, he is fed up with both ends of the political spectrum.

“This has been brewing for a long time,” Mr. Ruzika said. “They should have solved it before now.”

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[BOB] ABERNETHY: But the common good. This idea of the common good, very important in religious and ethics. How do you define it? And who says what the common good is?

[JIM] WALLIS: Well, this week we’ve organized 5,000 pastors to say let’s look at the real people in our congregations and our communities, what’s going to happen to them as opposed to the Washington, D.C. question, who’s up who’s down, who’s going to be the Speaker of the House next time, who’ll win the next election. The common good is about the real people, the people we have to always take into account. And pastors, I think, I wanted to talk to people whose job it is to have re-read the Bible. To get to, to focus on who the real people are here.

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….Americans are skeptical with good reason and that level of distrust will not go away if all we get is another bipartisan approach to kicking the debt problem down the road. In case you have forgotten, we raised the debt ceiling as recently as February 2010.

When will we gain control of our budget? We routinely hear about trillions in spending cuts, yet we spend more and more each year. Lip service is paid to cutting back, but we all know that spending cuts never, ever happen in Washington DC.

With a slowing economy, the argument is often made that government has to step in and do something. As you can see from the list above, our government has been doing exactly that. Yet, those policies have been ineffective so far.

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DJN: *DJ S&P: At Least 50% Chance Of Lowering US L/T Rtg Within 90 Days

*DJ S&P: US S/T Rtg Watch Reflects View Of Significant Uncertainty Of US Creditworthiness

Ugh.

The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

“It certainly underscores the importance of passing the debt ceiling and not putting us in default status, and making sure there’s a longer term fiscal plan to contain spending and the deficit we’ve been running up over the last few years,” said Anthony Cronin, a Treasury bond trader at Societe General SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “Maybe it’s the impetus to say we’ll need more of a concession.”

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Free lunchism is ultimately the problem with the no-new-taxes pledge that so many politicians have adopted. A refusal to raise taxes, no matter how principled, cannot take us back to the good old days. It would instead lead to a very different American society. For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military ”” or do some combination of the above.

“We cannot repeat the past when it comes to the federal budget,” Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, recently wrote. “The aging of our population and the rising cost of health care have changed the backdrop for federal budget policy in a fundamental way.”

The most important part of the recent Republican budget plan, written by Representative Paul Ryan, was that it acknowledged this reality…

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MARK SHIELDS: On revenue.

The reality is this, that every single group, whether it’s Simpson-Bowles, whether it’s Alice Rivlin and Pete Domenici, whoever it is — semi-serious, we probably should have said — yes, there have to be budget cuts to deal with the deficit problem and the debt, but there have to be revenue increases.

It’s become a dogma with Republicans now that anybody who votes for a tax increase is no longer a member of the club or the party….

MICHAEL GERSON: I think — I think Democrats are being equally unreasonable on the issue of entitlements.

This is our long-term spending challenge. It’s not that we tax too little. It’s that we have expensive entitlement commitments, an aging population, and health care inflation that have made that portion of the budget completely unsustainable….

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