The US government is about to run out of money.
That sounds more alarming than it is. There’s no danger of the US being unable to find investors willing to lend it money. Markets are – by and large – more than happy to hand over their cash to the US government for safe-keeping.
However, there is a technical sticking point – and that’s the US debt ceiling.
Markets had been expecting a nasty political showdown over the raising of this artificial limit on US government spending.
And then, surprising as always, President Donald Trump stepped in…
A sensible idea becomes an opportunity for political mischief-making
The US debt ceiling is a legislative limit on the amount of money the government can borrow.
In theory, the idea is to stop the government from spending too much. If the US hits the debt ceiling, and no one raises it, the country can’t borrow any more money. Technically, that could end up with the US defaulting on its outstanding debts.
In reality, it does nothing of the sort. When the debt ceiling is in danger of being reached, the Treasury warns the government. Various politicians then indulge in a load of political grandstanding and horse trading and shouting at each other. And in the end, the debt ceiling is simply raised.
As Peter Boockvar points out on Marketwatch.com, US Treasury data shows that “since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents”.
That’s because the idea of the US actually failing to pay its debts (in other words, defaulting on US Treasury bonds) is almost unthinkable. Indeed, it’s hard to think of a non-apocalypse-level event that would be more disruptive to the global financial system.
Now, a desire to control government spending is an admirable thing. It’s the citizens’ hard-earned money. Oversight should be required. But the debt ceiling itself is just a political gimmick.
This artificial ceiling doesn’t improve oversight, or encourage smarter thinking about spending. It merely creates an extra opportunity for political shenanigans, as well as periodic outbreaks of jitters in the financial markets.
And in recent years, of course, politics in the US has been even more polarised than normal. So the debt ceiling has become an increasingly potent political flashpoint.
In 2011, the US saw its AAA credit rating downgraded by a major rating agency for the first time, after S&P demoted the nation’s debt rating during one particularly nasty bust-up over the debt ceiling. Then in 2013, there was another bout of panic.
This month, we were looking at another debt ceiling scuffle. Analysts reckoned that the Treasury was set to run out of funds by mid-October. Markets were worried enough about the prospect to start avoiding short-term Treasury bonds maturing in late October – yields on those bonds spiked to their highest since 2008.
You can see why markets were worried. The brinksmanship was bad enough under Barack Obama. How bad could it get now?
And then Donald Trump did something very unexpected.
Trump’s surprising compromise
Trump has agreed a deal with the Democrats to extend the US debt ceiling and fund the government until December. It’s not much of an extension, but it bumps the debt debate a little way into the future at a time when the US is facing both the aftermath of Hurricane Harvey, and the potentially extensive damage from Hurricane Irma, currently making its way to Florida.
That’s not to mention the fact that there might be more military spending required, given all the fun and games over in North Korea.
The danger is that Trump has now seriously aggravated members of his own party – top Republicans were spitting feathers. Apparently, the president didn’t push the Democrats hard, if at all.
As Reuters reports, “conservative groups were aghast, accusing Trump of caving in to the Democrats rather than insisting on spending cuts to accompany the debt ceiling increase”.
Most Republicans wanted a deal that would, as the FT puts it, “push the next fight about the limit beyond the November 2018 midterm elections”. Instead, as they see it, the Democrats will now have a lot more political leverage ahead of those key votes.
So the danger is that the Republicans themselves will now reject the deal. That seems unlikely – it’s not a good look politically. But even if they don’t, it means we have another fight to look forward to at the start of next year. Particularly if the Republicans feel that the Democrats have got one over them this time.
However, it’s fair to say that markets are relieved – for now, at least. The yield on four-week US Treasuries dived back to normal levels (or normal by today’s standards).
A bigger question is whether this marks a new direction for Trump. Will doing a favour for the Democrats help him to get things done? Or will it make it even more difficult?
No one likes being unpopular and few presidents have been as unpopular as Trump. And over the years, Trump’s ideology has (I believe) been opportunistic rather than consistent. A shift towards the centre ground might annoy the people who voted him in, but he may calculate that they’ve served their purpose.
Of all the implications of this debt deal, I think this is the one to watch. A Trump revival could get markets excited all over again. Alternatively, it could move him one step closer to the exit door – which could also get markets excited all over again. Let’s see what happens next.