Larry Berman

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The U.S. Treasury General Account (TGA) could be empty by the middle of June or slightly earlier and all magical bookkeeping tricks may have been exhausted (these are all guestimates only).

The TGA has US$155 billion left and between now and the June 15 corp tax day, they will likely need to spend in excess of $200 billion. So, the technical default is imminent. When it comes to choosing who gets paid first, the bond holders will likely win over social security payments or payments to Medicare/Medicaid. Historically, federal employees could be furloughed to avoid having to make payrolls.

The last major debt ceiling battle was in 2011 with a smaller battle in 2013 as well. That led to Standard & Poors downgrading the U.S. credit rating to AA+ from AAA. Given that Europe was going through a debt crisis too at that point, it’s hard to determine how much market risk is isolated to the U.S. debt issue.

All (should) know, at the end of the day, the ceiling will be raised and there will be some additional fiscal restraint, but the deficit and debt problem will not end here. The U.S. (and all governments) debt and deficit issue will be a major headwind to growth for decades.

One part of the solution of course is a restructuring of entitlements, but that is a political hot potato and has been a historical impossibility. As we saw in Canada a decade ago, the Harper government started to graduate the age of benefits for OAS higher only to be reversed by the Trudeau government as an election promise.

The reality is that people are living and working longer and this is a smart policy, but it’s near impossible to take benefits away from people. When these policies were initiated decades ago, life expectancy was in the mid-60s, so the math worked. Today, with life expectancy in the mid-80s, it does not. Health care costs are extraordinary in the last few years of life.

With the cost of debt on the rise, the central banks of the world cannot afford inflation to take hold. With $31 trillion of debt in the U.S., every 100 basis points of higher yield adds $310 billion to the deficit. One can easily see that the path here is unsustainable. For now, it means little but some noise for your portfolios. Longer-term, it probably means that equity markets should carry a higher risk premium (lower multiple) as growth levels slow.

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