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Debt Ceiling–april Tax Collections Fall Short—debt Ceiling X-date Moves Closer—slim Republican Majority—swing District Republicans Likely To Vote For A Higher Debt Ceiling–debate May Increase Equity Market Volatility—seek Out Investment Opportunities That May Result

Date Posted: May 1, 2023

Debt Ceiling Uncertainties—extraordinary Measures Will End Soon

Uncertainty Continues To Grow Concerning The Outcome Of The Debt Ceiling Debate. Treasury Reached The $31.4 Trillion Debt Ceiling Borrowing Limit January 19th Without Congress Passing An Increase. Since Then, Treasury Employs “extraordinary Measures” To Pay Its Bills And Delay Bumping Up Against X-date—when The Government Cannot Fully Pay Its Obligations. Among Its Extraordinary Measures, Treasury Borrows From The Federal Workers’ Retirement Accounts—not Dissimilar From Individuals Borrowing From Their 401k’s. Figure 1 From Moody’s Analytics Traces The Likely Pattern Of Cash Balances.

Figure 1
Cash Balances and Available Extraordinary Measures ($ bil)


Source: Moody’s Analytics

April Tax Collection Shortfall—moves X-date Closer

Figure 2 Shows The Rapidly Declining Average Weekly Balance In The U.S. Treasury General Account—the Government’s Checking Account. The Decline Reversed Itself, Temporarily, With The Government Continuing To Receive Non-withheld Tax Payments Due April 18th. So Far, Nonwithheld April Tax Payments Declined An Estimated 25- 30% When Compared To Last Year’s Returns (See Figure 3.) This Shortfall Partially Reflects Lower Capital Gains Tax Payments, Which, In The Prior Two Years, Accounted For 14% Of Total Personal Income Taxes. At The Same Time, Higher Than Anticipated Federal Spending And Lower Tax Payments Worsen The Fiscal 2023 Deficit Outlook. With That, Forecasts Of When Treasury Will Reach X-date Fall Into Late July Or Even Earlier When Compared To Earlier Estimates Of Mid-august.

Figure 2
U.S. Treasury General Account—Week Average—January 1,2022-Apri 26, 2023

Figure 3
Taxes Tracking Below April Average

Source: Bloomberg

Debt Ceiling Debate May Increase Equity Market Volatility From Its Current Slumber

Congressional Debt-limit Debate Drama Happened Many Times Before And Investors Assume A Similar “happy “ending (See Figure 4.) While The Debt Limit Will Likely Be Raised Again Before The X-date, The Sharp Partisan Divisions In Washington Produce The Greatest Uncertainties For Raising The Debt Limit Since 2011. In That Year, The Contentious Debt Ceiling Debate Saw Three
Major Stock Indices Drop The Most Since The Great Financial Crisis. In Addition, Standard & Poor’s Downgraded The Long-term U.S. Credit Rating To Aa+. That Reduction Forced Bank Regulators To Rule That Banks Could Still Consider U.S. Debt “risk Free.” In Light Of That Experience, Rising Uncertainties, As X-date Moves Closer, Caused The U.S. Credit Default Swap (Cds) Spread To Spike (See Figure 5) And Will Likely Result In Equity Market Volatility Rising From Its Current Slumber. A Spike In Equity Market Volatility As X-date Moves Closer Could Spur A Final Congressional Settlement.

Figure 4
U.S. Gross Nation Debt and Debt Ceilings (trillion $)

Source: US Treasury Department,

Figure 5
U.S. One Year Sovereign Credit Default Swaps (bps)

Source: Bloomberg

Republican Passed Bill Increasing Debt Ceiling With Fiscal Reform Will Force Negotiations

The House Republicans Passed (April 26) And Sent To The Senate A Bill That Both Raises The Debt Ceiling By $1.5 Trillion And Calls For Significant Fiscal Reforms. The Republican Fiscal Reforms Would Reduce The Projected $21 Trillion Of Government Deficits Over Ten Years By $4.8 Trillion. The Democratic Senate And White House Continue To Reject The Bill’s Fiscal Restraints As A Condition For Raising The Debt Ceiling. Nonetheless, The White House And Congressional Democrats Will Ultimately Be Forced To Sit Down With Republican Leadership As X Date Comes Into View. Interestingly, In The 2011 Debt Ceiling Impasse, Vice-president Biden Led The Deficitreduction Talks For The White House. With The Ongoing Presidential Election Cycle, The White House Will Make Every Effort To Settle Without Breeching The Debt Ceiling.

Slim Republican House Majority Likely Leads To Middle-of-the-road Republicans Ultimately Voting To Raise The Debt Ceiling—no Matter

At The Last Minute, With A Slim Republican Nine Seat Advantage In The House, It Would Not Be Surprising To See A Handful Of Republicans Vote To Raise The Debt Ceiling. Slippage Would Come From Mainstream Republicans Looking To Protect Seats In Their Swing Districts. This Would Likely Occur Despite, At Best, Only Limited Fiscal Spending Reform. Once Raised, Treasury Will Then Issue An Avalanche Of Bills And Notes Sucking Deposits Out Of The Banking System And Quickly Raising The Amount Of Federal Debt Outstanding.

A U.S. Default On Its National Debt May Violate The U.S. Constitution

Defaulting By The U.S. On Its National Debt May, Potentially, Violate The Constitution. Section 4 Of The Fourteenth Amendment To The Constitution Reads, In Part: “the Validity Of The Public Debt Of The United States……….shall Not Be Questioned.” Passed By Congress During The Civil War, This Amendment Also Proscribes That The U.S. Government Would Not Pay Any Debt Incurred By The Confederate States Of America. Further, In 1935, The Supreme Court (Perry Vs U.S.) Stipulated This Meant Congress’ Borrowing Carries With It The “highest Assurance Of Payment The Government Can Give—its Plighted Faith.”

Severe Consequences Of Not Raising The Debt Limit—or Why Congress Will Raise It

Higher Interest Rates: U.S. Debt Defaults Would Likely Lead To A Downgrade Of The U.S. Credit Rating By Credit Agencies. This Would Cause Lenders To Demand Higher Interest Rates For Loans To The U.S. Government.

Financial Market Turmoil: Default Would Likely Lead To A Sharp Drop In The Value Of U.S. Treasury Bonds, Widely Used As A Safe Haven Asset By Investors Around The World.

Economic Recession: In Light Of Current Economic Uncertainties, Default Could Trigger A Recession As Investors Pull Their Money Out Of U.s. Financial Markets, Leading To A Decrease In Consumer And Business Spending, And Job Losses.

Damage to U.S. Reputation: A Default Would Damage The Reputation Of The U.S. As A Reliable Borrower, Potentially Leading To A Loss Of Confidence In The U.S. Dollar As The World’s Reserve Currency. In Short, A Default On U.S. Debt Would Produce Such Severe Consequences For The U.S. And Global Economy, And A Scenario That Policymakers Would Seek To Avoid At All Costs

Investment Conclusions

Equities— Equity Market Volatility Will Likely Increase As We Approach Closer To X-date Without A Settlement. In Our View, At The Last Minute, If Not Sooner, Congress Will Raise The Debt Ceiling. Any Equity Market Selloff Should, Therefore, Be Used To Look Beyond The Current Uncertainties Resulting From Both The Debt Ceiling Debate And Economic Concerns To Potential Investments That Will Gain As Investors Look Into 2024. With Economists Looking For Slow Growth In 2024, Quality Companies That Can Demonstrate Sustained Free Cash Flow And Dividend Growth Based On Above Average Returns On Equity Should Prove Attractive Investments. In Searching For Growth, Investors Should Dig Deeper Below The Most Well Recognized Names.

Fixed Income—“Income” In Fixed Income Now Carries Real Meaning. As 2023 Progresses, Lengthening Bond Duration, By Degree, Will Likely Prove Increasingly Attractive When And If The Economy Slows And Inflation Comes Down From Its Current Elevated Levels. Alternative Investments Can Also Be Used For That Portion Of The Portfolio Historically Committed To Fixed Income; Alternatives Tend To Be Less Correlated With Stocks And Bonds. That Diversification Will Also Prove Particularly Valuable With The Current Investment Uncertainties.