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Why The US Running Out Of Cash In 4 Weeks Is Good News

Over the past several weeks, Americans (not to mention the market) were forced to grapple with the latest example of congressional infighting and outright legislative gridlock as US lawmakers narrowly averted a government shutdown in the wake of House Speaker John Boehner’s surprise resignation.

Now, the debt ceiling battle looms ahead of Boehner’s October 30 exit and according to Treasury Secretary Jack Lew, the US will run out of money to pay its bills far sooner than originally expected - November 5, to be exact. Here’s WSJ:

The government will run out of money to pay its bills sooner than previously thought, forcing Republican lawmakers who are already scrambling to elect new leaders to immediately confront a series of unpopular fiscal deadlines.

 

Treasury Secretary Jacob Lew said the government would be left with just $30 billion cash on or around Nov. 5. Government outlays can be twice that level on certain weekdays, underscoring the need to raise the federal borrowing limit, Mr. Lew said in a letter late Thursday to House Speaker John Boehner (R., Ohio).

 

“Without sufficient cash, it would be impossible for the United States of America to meet all of its obligations for the first time in our history,” Mr. Lew said in the letter.

 

The new debt-ceiling deadline falls less than a week after Mr. Boehner will leave Congress, putting pressure on him—and an incoming Republican leadership team—to pass legislation raising the limit before that transition. Some congressional estimates had indicated the government could get by without action until December. Traders and Wall Street analysts are watching the timeline closely due to the turbulence that hits financial markets as debt-limit deadlines approach.

And so, the stage is once again set for GOP lawmakers to use the debt ceiling as a negotiating tool in an effort to extract concessions from the White House while the rest of the world looks on incredulous at the spectacle the US creates when its lawmakers effectively blackmail themselves by threatening to force the nation into default in order to secure a bit more bargaining power.

Of course this never ends well and only serves to i) undermine Washington's credibility with the rest of the world, ii) increase market volatility as investors can never completely rule out the possibility that this time around, someone might actually make good on their threats, triggering a technical default somewhere, and iii) further destroy the government's credibility in the eyes of voters to whom the entire thing appears completely absurd. Note that the latter point there speaks to why Donald Trump is polling so well in the GOP primaries - the electorate is simply fed up with lawmakers' inability to do what they were elected to do (i.e. legislate). 

In the end, the result will likely be the same as it always is. Some last minute can kick will ensure that the US doesn't default and the debt limit will be raised to a number that's even more meaningless than it is now, ensuring that America remains on track to eventually compete with Japan for world's worst debt-to-central government revenue ratio.

And as if the whole thing weren't ridiculous enough as it is, consider this bit of counterintuitive silliness: the fact that the timetable for an unprecedented US default has just been moved up by a month is actually good news this time around because it means that the negotiations will likely be presided over by Boehner as opposed to his successor and because Boehner will be out the door at the end of October anyway, he'll be free to negotiate in good faith. 

In any event, we suppose it's best to just give the last word to Goldman since they're probably the ones who will end up making the final decision anyway.

From Goldman

USA:  Earlier Debt Limit Deadline Might Lower Risk of Disruptions

BOTTOM LINE: Treasury Secretary Lew has notified Congress that the debt limit will need to be raised by November 5, earlier than expected. This increases the probability that it will be voted on before Speaker Boehner leaves office on October 30, which would reduce the risk of a disruptive last-minute increase in the limit.

MAIN POINTS:

1. In a letter to congressional leaders, Treasury Secretary Lew has indicated that the debt limit will need to be raised by November 5. This is slightly earlier than the mid-November deadline that we had recently estimated and is due, according to the Treasury, to a combination of slightly weaker-than-expected estimated taxes in September and higher-than-expected obligations associated with certain trust funds.

2. This earlier deadline raises the probability that the House will vote to raise the debt limit prior to the time Speaker Boehner steps down on October 30. If so, this would reduce the risk of a disruptive debate on the issue, because Speaker Boehner is more likely than his successor, in our view, to allow a "clean" debt limit increase without the debate over extraneous issues that have delayed enactment until shortly before the deadline in the past.

3. By contrast, this reduces the probability that the debt limit would be dealt with as part of a broader fiscal negotiation that also includes the extension of spending authority past the current December 11 expiration. Such a scenario would presumably involve negotiations over spending levels and other matters that could create significant uncertainty in the period leading up to the deadline, similar to the experience in the summer of 2011.

4. That said, the path forward for increasing the debt limit is still uncertain. There has been no indication yet from congressional leaders on how they plan to proceed with increasing the debt limit in light of the new deadline. However, we recently noted the possibility that legislation to extend the Highway Bill, which expires October 29, could be a vehicle for other items, including the debt limit, and today's announcement makes that a bit more likely, in our view.