The Fed’s December transcript reveals some interesting foresight by Philadelphia Fed president Charles Plosser in discussions about how the Fed should communicate its regime shift (i.e. that it was moving away from targeting the Fed Funds rate towards using base money, balance sheet and other quantitative measures as its primary tools).
In the transcript, Plosser refers to the fact that near-zero rates and unconventional policy will eventually have to be overturned, and that this could be a tricky challenge for the Fed when the time comes. Nevertheless, he also notes that when it comes to the Fed’s balance sheet, the introduction of interest on excess reserves (a.k.a a floor system) means the Fed can in theory continue to control rates without shrinking its balance sheet at all for some time. Read more
Eventually I’m going to do exactly what the other side wants me to do seems like an odd starting point for a negotiation.
But the debt ceiling negotiation that matters right now isn’t between Republicans and Democrats, but between the Republican leadership and the Republican won’t-be-leds. In that context, John Boehner’s comments last week — “We do not want to default on our debt, and we’re not going to default on our debt” — established his position ahead of meetings with the Republican tea-party flank and other potentially rebellious members. (By happy coincidence, it is also the sensible position.) Read more
Noted simply because we didn’t know it existed before:
COMMONWEALTH INSCRIBED STOCK ACT 1911 – SECT 5
Limit on stock and securities on issue
(1) The total face value of stock and securities on issue under this Act and the Loans Securities Act 1919 at any time must not exceed $300 billion…
Here’s a list of the 144 Nays on last night’s House debt ceiling vote (so implicitly, then, 144 votes to find out how long the US could have gone before defaulting). Click to enlarge.
This piece of comparative calm is very definitely to be read in conjunction with Cardiff’s post on how the Treasury’s payment system (might) work.
It’s to do with the fact that there is no cross-default clause in US Treasuries. That means a missed payment on one bond would leave the other bonds unfazed, and equally usefully, if needed bonds can be split up into a ‘delayed component’ and a ‘normal component’ .
Pity the EM sovereign with such sloppy protections, eh? Read more
The markets have spoken and they are ambivalent: fine, you want to shut the government down, see if we care.
Nomura’s Jens Nordvig finds that stocks are up a bit, emerging market currencies doing well and bond yields slightly higher. However, there was movement on Tuesday that suggested the first nervous rearranging of assumptions around a US default.
In the absence of an agreement to raise the debt ceiling October 17 is the estimate for when emergency measures to fund the government are exhausted. Read more
This was Paul Krugman’s guess about what a debt-ceiling fueled government shutdown could lead to:
I’m not at all sure that we’re looking at an interest rate spike; maybe even the opposite. But for sure we should be looking at a plunging dollar, and probably carnage in the stock market too.
Courtesy of Deutsche Bank, here’s the latest change in net dollar futures positioning as of last week: Read more
Greg Ip has the single best post on the economics and logistics of the Platinum Coin option that we’ve come across.
It includes a solution that involves two of our favourite topics from 2012: the expiration of the Transacton Account Guarantee and the safe asset grab (even throwing in a bonus Gary Gorton reference). Read more
A lot of people seem to be talking past each other about the Trillion Dollar Coin idea. That sometimes happens on Twitter and the blogosphere, where much of the debate has taken place.
But one place to start a reasonable discussion is to note again that nobody really disagrees with this: Read more
If you were in search of some light weekend reading, we’ve got just the thing (click for pdf):
On Wednesday, President Barack Obama’s proposed increase in the federal debt limit was rejected by the House of Congress, by a vote of 239-176, the WSJ reports. However, the vote was largely symbolic as the increase would need to be rejected by by two-thirds majority in both the House and Senate in order to be blocked. The provision for the President to push through increases in all but staunch opposition, was agreed in a bipartisan deal last August in order to ensure that the government would not default on its obligations. A vote will be held in the Senate next week. The WSJ quotes Republican Jared Polis as saying, “We’re here playing this game of Kabuki theater, this is all fun and games, but the country is burning.” The increase requested is for $1,200bn – an amount that would cover costs until after elections in November, and would see the government’s borrowing limit move up to $16,394bn.
US lawmakers moved closer to a deal on Monday to fund the government through next year, potentially avoiding a shutdown that would have further damaged Congress’ tattered reputation ahead of the 2012 election, Reuters reports. The group of Republican and Democratic lawmakers tentatively agreed on how to fund a wide range of government functions from homeland security to protecting the environment, congressional aides said. The details were not immediately available and lawmakers were expected to publish the massive spending bill on Tuesday, said Reuters. “There are still a couple of open items that need to be ironed out. These aren’t deal breakers or game changers but are still important issues,” said a Democratic spokesman for the appropriations committee in the House of Representatives.
The US congressional committee responsible for striking a deficit reduction deal ended its work without an agreement on Monday, delaying any solution to America’s debt problems and setting the stage for a sharp clash over budgetary policy ahead of the 2012 elections, the FT reports. The announcement by Representative Jeb Hensarling and Senator Patty Murray, the Republican and Democratic co-chairs of the panel, came just after the close of trading on US financial markets on Monday, prompting a wave of disappointed reactions from across the political spectrum and business. The failure of the committee also stoked fresh concerns that political gridlock could diminish the prospects for passage of economic stimulus measures to prop up the world’s largest economy in 2012, and threaten a partial government shutdown as early as next month. Mr Hensarling and Ms Murray sought to strike a conciliatory note in their joint statement. “Despite our inability to bridge the committee’s significant differences, we end this process united in our belief that the nation’s fiscal crisis must be addressed and that we cannot leave it for the next generation to solve,” they said.
Or, if Ben won’t budge, then what?
We closed our last post by writing that “if policy is needed to offset household deleveraging and the corresponding reluctance of businesses to spend, help would have to come from the fiscal side.” Read more
Tin hat — check.
Sad trader face – check. Read more
Yet more worries on Wednesday about the escalation of funding stress — this time from Nomura’s macro strategy team.
Like Morgan Stanley, it notes the rise in dollar funding costs (as displayed in the first chart below) through the FX basis market. It’s also perturbed by the results of the ECB’s most recent one week refinancing operation, which were overshadowed by the debt ceiling’s oxygen-sucking, bone-shattering news storm. Read more
Some debt doom and gloom from Independent Strategy’s Bob McKee…
The spectre of an imminent US default on its debt disappeared as legislation to increase America’s borrowing authority cleared its last remaining hurdle in the Senate and was signed by President Barack Obama, reports the FT. The last-minute congressional approval of an increase in the debt ceiling came after weeks of aggressive political rhetoric and fraught negotiations over fiscal policy that carried the country to the brink of a potential economic calamity, threatening its triple A credit rating and the status of Treasury bonds as a safe harbour for global investors. There’s plenty to worry about, though, with stocks tanking amid falling consumer spending, adds the FT.
Introducing the debt ceiling relief rally:
On Tuesday afternoon Fitch reaffirmed its commitment to the US’s AAA rating.
The statement from the rating agency, which has been less critical of the US fiscal trajectory than Moody’s and S&P, describes the US’s debt ceiling deal as “commensurate with its ‘AAA’ rating”. Its timing was Chopinesque — at pixel time the President was set to sign the Budget Control Act, following the Senate’s Tuesday 74 to 26 vote in favour of the deal. Read more
The Budget Control Act will reduce annual US federal deficits by at least $2,100bn by 2021, according to the CBO. But will it?
Analysis published Tuesday by Barclays Capital argues that it won’t. This is due to the overly optimistic growth assumptions underpinning the CBO’s new deficit projections. Douglas Elmendorf, the CBO director, writes on the CBO blog that its analysis was performed relative to CBO’s March 2011 baseline. Read more
With the US debt ceiling debacle still in full play, anyone scouting for stress signals is very much tuned into developments in the US repo market.
Overnight general collateral rates are on the rise, as are MBS repo rates. That’s despite Sunday’s last-minute debt deal and Monday’s House vote. Read more
Big oil companies, pharmaceuticals businesses and hedge fund managers seemed to be spared immediate pain by the debt-ceiling legislation that was passed in the House on Monday night after Democrats failed in their attempt to include tax increases and other measures, the FT says. But companies such as ExxonMobil and Carlyle still face the risk of being stripped of some favourable tax perks by the second step of deficit reduction, in which a joint committee will be mandated to form a plan for $1,500bn in extra savings by November’s end. The committee is expected to at least consider long-term changes to Medicare, according to Nurse.com, which could impact pharma firms.
The US looked set to avoid a potentially catastrophic default on its debt and a permanent stain in its global standing after the House of Representatives voted to increase the debt ceiling by a comfortable margin following weeks of heated negotiations and brinksmanship, the FT reports. The legislation, which would cut spending by $2,400bn over 10 years and increase the debt ceiling until 2013, was due for a final vote in the Senate on Tuesday, where it was also expected to pass with a strong majority. Barack Obama, the US president, could enact the legislation ahead of today’s midnight deadline. The LA Times reckons the deal may avert default but does little to solve the US’s economic woes, while Bloomberg fears the US government has become “hyper-polarised.” Reuters adds that the agreement could trigger a battle over tax reform within weeks and turn Washington once again into a dateline for deadlock.
White House and Republican leaders dashed to shore up support on Capitol Hill for a compromise that would prevent a US debt default, even as the markets switched their focus to more bad news about the economy, writes the FT. House majority leader Eric Cantor was confident that enough Republicans would vote for the deal, reports Bloomberg. FT Alphaville earlier assessed the winners and losers of the deal. Meanwhile, eyes are turning to S&P, whose previous comments suggest that the US deal is too small to avert a downgrade, reports the FT.
The winners have been profiled. Now for the ugly part.
Losers Read more
Barring a Republican rebellion in the House of Representatives, the Budget Control Act of 2011 will be passed by both houses of Congress on Monday, and sent to the President for his signature.
Despite the resurrection of real market-shifting news on Monday, it’s worth quickly reflecting on the deal. A few other sites have done some post-mortems from a political or policy point of view. But see below for FT Alphaville’s debt ceiling winners and losers. (It was a lot harder to find winners than losers.) Read more
President Barack Obama announced on Sunday night that US Congressional leaders had reached an agreement on a tentative deal that would raise the US government’s borrowing limit and avoid a US default, prompting a positive response from Asian financial markets, the FT reports. The proposed cuts meant the US’s annual domestic spending will fall to the lowest level since Dwight Eisenhower was president in the 1950s, Obama said in a speech. The deal hammered out, which is to be voted on in both houses on Monday, would see the $14,300bn debt ceiling raised by $2,400bn in two stages but would avoid another drawn-out negotiation before the presidential election in November 2012, a key Democratic demand. In return, Republicans would get $2,800bn in spending cuts over the next 10 years.
10-year US Treasuries just had their biggest one day rally since March 2009.