Posted May 17, 2023
By Jim Rickards
JPMorgan Opens War Room
The “X-Date” is the day the U.S. Treasury goes broke. It’s not the same as the debt ceiling but it is a consequence of the failure of Congress to raise the debt ceiling.
Right now, the Treasury is at the debt ceiling. That means it has no legal authority to issue net new debt. It can issue new debt if old debt is maturing. That keeps the total debt unchanged; you’re just rolling over maturing debt into new debt without increasing the total debt.
The problem is that the U.S. is running $2 trillion per year deficits. It’s not enough to just roll over existing debt. You have to issue new debt to finance the deficits and that’s where the debt ceiling bites.
How is the U.S. Treasury paying its bills today without new debt? They’re playing shell games, playing fast and loose.
There is some net cash flow from tax collections in the April time frame although that’s being rapidly depleted by tax refunds. There are some other tax collections including excise taxes.
The Treasury has some slush funds including the Exchange Stabilization Fund (ESF), currently over $100 billion. The ESF was created in 1934 using the profits from FDR’s confiscation of gold at $20 per ounce and subsequent revaluation to $35 per ounce.
It has been used numerous times including in the 1994 Mexican bailout that Congress refused to authorize (ESF use has no congressional oversight).
Recently part of the ESF was used to bail out Silicon Valley Bank. But eventually even the cash flow and the slush funds run out of juice. Then the Treasury goes broke. That’s the X-Date.
JPMorgan Convenes a War Room
Treasury Secretary Janet Yellen recently estimated the X-Date is June 1. Yellen knows little about monetary or fiscal policy and her June 1 date was probably a political ploy to put pressure on Republicans to raise the debt ceiling without conditions, as favored by the White House.
We shouldn’t rely on Yellen’s estimates; she’s not very competent at this. That’s being generous. She’s over her skis. All the same, there is an X-Date and it’s coming sooner rather than later.
Most investors are ignoring this development and are assuming that Congress will strike a deal with the White House, raise the debt ceiling and make the X-Date go away (for now). Well, all I can say is don’t be so sure.
JPMorgan has actually convened a war room that will soon be meeting three times per day to deal with the fallout of the X-Date and the possibility of the U.S. missing principal and interest payments on U.S. government securities or possibly skimping on Social Security payments or other entitlements.
They’re obviously taking the X-Date seriously, even if investors aren’t.
Whether the X-Date arrives or not, investors should at least be prepared for the market turmoil that will arise as the impasse between Congress and the White House comes down to the wire.
The Bigger Picture
These are all short-term concerns. They’re important, but let’s zoom out toward the bigger fiscal challenges facing our nation…
Those who focus on the U.S. national debt (and I’m one of them) keep wondering how long this debt levitation act can go on.
The U.S. debt-to-GDP ratio is basically at the highest level in history (124%), with the exception of the immediate aftermath of the Second World War. At least in 1945, the U.S. had won the war and our economy dominated world output and production. Today, we have the debt — but without the global dominance we had in 1945.
The U.S. has always been willing to increase debt to fight and win a war, but the debt was promptly scaled down and contained once the war was over. Today, there is no war comparable to the great wars of American history, and yet the debt keeps growing.
Debt has been increased and decreased on a regular basis over the long period of American history. But never until today was there a view that the deficit didn’t matter, and that it could be increased indefinitely.
Consider that it took the United States 193 years to accumulate its first trillion dollars of federal debt. Amazingly, it routinely adds that much debt these days. These historic debt-management efforts have been bipartisan.
Republicans Harding and Coolidge reduced the debt; the Democrat Andrew Jackson actually eliminated the debt in 1836. Today there is bipartisan profligacy. Neither party today has the will to restore fiscal responsibility.
One party outright rejects financial responsibility altogether, the other party simply pays lip service to it. That’s why you can expect more of the same.
The Trump Card
Although I was laughed at, I predicted that Trump would win the 2016 election. I was less sanguine about his prospects in the 2020 election, for a variety of reasons. And looking ahead? If Trump receives the 2024 Republican nomination, which I believe he will, he will face the same obstacles, only stronger.
The Deep State, the administrative state, whatever you want to call it, along with powerful factions within his own party, are moving heaven and earth to prevent Trump from getting the 2024 Republican nomination.
Regardless, we need to recognize that Trump is not some kind of fiscal conservative. He isn’t. And he wasn’t. He wasn’t a Paul Ryan Republican, whatever you think of Paul Ryan.
Regardless, today, in 2023, it doesn’t matter. Why not? Because the United States is going broke.
I don’t say that to be hyperbolic. I’m not looking to scare people. It’s just an honest assessment, based on the numbers.
How Can This Possibly Be Sustained?
Right now, the United States is over $31 trillion in debt. Now, a $31 trillion debt would be fine if we had a $50 or $60 trillion economy. The debt-to-GDP ratio in that example would be manageable.
But we don’t have a $50 or $60 trillion economy. We have about a $23 trillion economy, which means our debt is much, much bigger than our economy.
This is a question that I’ve asked before, but I need to ask it again: When is the debt-to-GDP ratio too high? When does a country reach the point that it either turns things around — or ends up like Japan?
As I’ve explained in previous articles, economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.
They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, they found, a turning point arrives…
At that point, a dollar of debt yields less than a dollar of output. Debt becomes an actual drag on growth. Again the current U.S. debt-to-GDP ratio is about 124%.
Deep Into the Red Zone
We are deep into the red zone, that is. And we’re only going deeper. The U.S. has a 124% debt-to-GDP ratio, trillion-dollar deficits are on the way, more spending is on the way.
We’re getting more and more like Japan, with its lost decades. We’re heading for a sovereign debt crisis in one form or another. That’s not an opinion; it’s based on the numbers.
Many nations around the world are actively seeking payment alternatives to the dollar, which has only been accelerated by the unprecedented sanctions against Russia.
The process is well underway, which has of course been accelerated by the drastic U.S.-led sanctions against Russia.
The world wants a change. I keep thinking about the saying widely attributed to Lenin: “There are decades where nothing happens; and there are weeks where decades happen.”
These days, it seems like decades are happening in days…