This Financial Threat May Be Bigger Than the Banking Crisis

The new global financial crisis, as exemplified by the successive failures of Silvergate Bank, Silicon Valley Bank, Signature Bank, Credit Suisse and the potential failure of First Republic Bank, is well underway. Despite a brief hiatus after the UBS-Credit Suisse shotgun wedding on March 19, the crisis is far from over.

Other big bank failures and continued stress on the system should be expected in the coming months. That financial crisis comes on top of an emerging recession, as shown by shrinking world trade, declining manufacturing output, monetary tightening, continued inflation, declining housing prices, and many more hard data points.

The combination of a financial crisis and a recession is similar to the global financial crisis of 2008. Investors are rightly concerned about this combo crisis, but there’s another threat that may be more dangerous than a recession or panic that will make 2023 a Trifecta for the ages. That threat is the possibility of the U.S. Treasury going broke and defaulting on U.S. government securities and other payment obligations of the government.

This threat comes from the failure of Congress to raise the debt ceiling, as described in this article. The debt ceiling is a statutory limit on the total amount of debt the U.S. Treasury is allowed to issue. The debt ceiling is reached every few years because the Treasury keeps issuing more debt to finance ongoing budget deficits.

The total U.S. debt today is about $31 trillion. That’s the amount of debt in the form of U.S. Treasury bills, notes, and bonds.

Of course, there are tens of trillions of dollars more in contingent liabilities in the form of promised social security benefits, Medicare benefits, student loan guarantees, and mortgage guarantees. But let’s leave all of those aside for now and focus on the $31 trillion of so-called bonded debt.

When the Congress and White House are controlled by the same political party (as was the case in 2021 and 2022), raising the debt ceiling if needed is routine. But, when one party controls the White House, and the other party controls one or both houses of Congress, as is the case today, a game of political chicken can result where both sides make demands and bargain down to the final days before the Treasury goes broke.

This has happened before in recent decades. Why are things so much more dangerous today?

First of all, the debt is bigger than ever and growing faster than ever. Of the $31 trillion in debt, about $10 trillion was added just in the past three years, mostly under the guise of “COVID relief” and the Green New Scam (wrongfully called the Inflation Reduction Act of 2022). The spending is out of control.

The second reason is that the Republican-controlled House of Representatives is guided by more fiscally conservative members who belong to the Freedom Caucus or were part of the Gang of Twenty who held up Kevin McCarthy’s election as House Speaker through 15 ballots, the most in over 100 years.

Republicans are demanding fiscal accountability and reductions in planned spending on domestic discretionary items. The White House is demanding a “clean” debt ceiling bill, which means no concessions to the Republicans. Both sides are dug in.

Right now, the Treasury can issue new debt to replace maturing debt (that does not increase the total debt), but no more. Treasury is paying bills with slush funds (such as the Exchange Stabilization Fund) and with positive cash flow resulting from tax season. Those gimmicks will run out soon.

Treasury is getting closer to the “X-Date” when it really does go broke. No one knows the exact day of the X-Date, but estimates converge around July 15.

Investors will soon start to demand much higher interest rates to compensate them for the risk of default as July 15 draws near. This is just one more critical risk for securities markets on top of the bank crisis and recession. Gold is a good safe haven until the crossfire stops.

Corporate leaders and institutional fiduciaries looking to incorporate state of the art predictive analytics to their risk mitigation and strategic analysis should click the link to learn more about Raven Predictive Analytics®