So far this year, we’ve seen improvements with increased investment opportunities as businesses appear to be recovering and new ventures are obtaining needed capital. We are expecting that portfolio recovery will continue in parallel with improving inflation and business growth rather than the current politically created debt ceiling crisis.
This debt ceiling extension (currently at $31.5T) crisis is causing the US irreparable damage in the eyes of those who buy our debt. For many it is a demonstration that the US debt is no longer a low-risk investment of choice. Hopefully this deadlock will be resolved without further damage to our financial standing. According to Yellen, it needs to be approved by June 5th.
The current agreement caps military spending at $886B and nonmilitary discretionary spending at $704B and would only allow increases of $9B and $7B respectively in the following year. This means a claw-back of the unspent COVID relief ($28B) and shift of $20B to nondefense items. Also elimination of at least $1.4B funding for the IRS. There are increased work requirements for some recipients of Medicaid, Temporary Assistance for Needy Families (TANF) and the Supplemental Nutrition Assistance Program (SNAP). A requirement to streamline permitting in the National Environmental Policy Act was also added to the list. These are some of the requirements to extend the Debt limit beyond the next election. So far the agreement has no impact on Medicare/Social Security/climate change and promotion of clean energy.
As soon as this crisis is resolved we will refocus on economic activity and inflation to prepare for the next Federal Reserve meeting on June 14th. On June 2nd we expect the employment report and June 13th the CPI (Consumer Price Index). Together this information will guide the Federal Reserve on whether to implement the current expected ¼% interest increase.
Finally, it is hard to understand how we willingly accept debt accumulation levels for the US that we wouldn’t accept for ourselves. As you know from your own finances, if you take on too much debt then you may not have a lender for additional debt. In the same manner as we saw recently with the runs on the SVB and First Republic Bank, when the US debt exceeds the amount that willing buyers want to buy, then central banks do not have anyone to provide us with liquidity, so they have to increase interest rates or print dollars. This crisis would be worth the turmoil if it actually generated actions that deal with the long-term accumulation of US Debt regardless of who is in government. The last time we attempted to deal with US Debt was in 2010-11 with the Simpson-Bowles plan under Obama and yet our debt accumulation has continued to grow.
Edi Alvarez, CFP®
BS, BEd, MS