The Breakdown - Debt Ceiling Deal Gives Unlimited Debt Till 2025

Episode Date: May 31, 2023

Today on The Breakdown, NLW wraps up the macro story that has dominated discourse for the last month.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Tuesday, May 30th, and today we are wrapping up the macro story that has dominated markets for the past couple of months. Before that, a quick note, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well today, as I said, we are hopefully wrapping up or at least putting a big momentary pause on the macro story that has dominated markets for the past few months. Yes, a deal has been reached in the debt ceiling standoff, with both President Joe Biden

and Republican House Speaker Kevin McCarthy making major concessions in order to move the matter forward. The deal on the table would suspend the debt ceiling entirely until the 1st of January 12th. 2025. Presumably this puts off the next dispute over federal borrowing until the middle of that year and uncapping the debt limit in the interim. The core of the argument is a two-year cap on federal spending, although each side is presenting the story slightly differently. The White House claims the spending cap would reduce spending by around $1 trillion over the next decade, while the GOP argued that spending cuts are twice that level. New York Times analysis puts the spending reduction

at around $55 billion next year and another $81 billion the following year. So let's talk about what's actually in the deal. The set of tradeoffs in the deal have caused outrage among numerous groups of ideologically aligned lawmakers and special interest groups on both sides of the aisle, to the point where there are a few truly happy with the compromise. Now, that of course might mean in America's polarized politics that it's actually a good compromise deal. IRS funding has been cut with $20 billion of the $80 billion in additional funding to bolster the tax department now being repurposed to fund discretionary government programs. And what's worth Noting here is that early in the negotiations, this IRS funding was a red line for the president.

You will no doubt remember when he said that he would not accept any deal that benefited, quote, wealthy tax cheats and crypto traders. Another aspect of the deal was that work requirements for food stamps recipients will be expanded. However, the cohort of people this will affect appears to be small, only impacting recipients age 50 to 54, while exempting veterans, the homeless, and people who grew up in foster care. However negligible the effect on the budget, the expansion of work requirements within the benefits program was an important symbolic policy for hardline conservatives. And small as the concession might seem, there are still many on the left who are very, very against it. Sharon Parrott, president of the Center on Budget and Policy Priorities, warned that,

quote, the agreement puts hundreds of thousands of older adults aged 50 to 54 at risk of losing food assistance, including a large number of women. Another aspect of the deal was fossil fuel permit reform. This was granted to GOP negotiators in a move which will fast track pipeline and natural gas projects. Permit reform was explicitly made a bargaining chip in the negotiations in exchange for Republicans backing down from demands to cut spending on renewable energy and climate change policies. This measure seems to have appeased potentially obstructionist West Virginia Democrat Joe Manchin, who said he was proud to have secured support for the local Mountain Valley Pipeline Project, which is specifically mentioned in the bill.

Major environmental group, the Sierra Club, rejected this part of the deal in a statement. Any deal that attempts to expedite the fracked gas mountain valley pipeline that rolls back bedrock environmental protections, and makes life harder for workers and families already struggling is a bad deal for the country. Another group left upset by the deal were Warhawks, who were dismayed at the defense budget being limited to a 3.3% increase already proposed in this year's White House budget. Republican Senator Lindsey Graham, who had been part of the GOP contingent pushing for a much higher defense spending, said, quote, spending below inflation is not fully funding the military. Lastly, at least for our purposes, the moratorium on student

debt payments will finally come to an end after being extended multiple times over the past three years. Student debt forgiveness was not part of the deal, instead being subject to an ongoing Supreme Court challenge. 30 billion in unspent pandemic relief funds will be clawed back and redeployed into other discretionary programs. So let's talk about now where lawmakers stand on this. With the deal now finalized and legislation proposed, the matter will now move on to Congress for a vote. McCarthy had earlier flagged that his GOP colleagues would require three days to consider the bill before it could be put on the floor, meaning a House vote will likely be called on Wednesday. Senate Democrat leader Chuck Schumer flagged that senators must be prepared to work through next weekend

if dissenters use procedural obstacles to delay the vote. It never ceases to amaze me just how scary it is for politicians to work over weekends and during their vacation time. Now, Republican centrist appear to be comfortable with the compromise, with Utah Senator Mitt Romney tweeting that he supported the deal and adding that, quote, This deal is good for the country in that it prevents a default and subsequent financial meltdown while also limiting spending.

Moderate Democrat, Annie Custer, the chair of the new Democrat coalition leadership team, echoed this sentiment, stating that the deal would, quote, avoid economic collapse while preventing cuts to key programs. Even some in the hardline GOP Freedom Caucus appear to be preparing to hold their nose and vote for the deal, reversing course on prior calls not to negotiate. Marjorie Taylor Green tweeted her agreement with the idea that further spending cuts can be fought over later in the year when it comes to budget appropriations. The debt ceiling fight has never been our only chance.

she wrote, this is a game of inches and we have the momentum. The bill text is not even out yet. Let's wait to read the bill. Now, others in the Freedom Caucus were much less enthusiastic. Lauren Bobert tweeted, The usual establishment people are popping champagne over this debt ceiling deal. It's more worthy of a bud light. Byron Donalds of Florida wrote, after I heard about the debt ceiling deal, I was a no. After reading the debt ceiling deal, I am absolutely no. Indeed, as I am recording, a group of GOP lawmakers are threatening to exact revenge on McCarthy for the deal. Dan Bishop of North Carolina said that he plans to trigger a formal process to remove Kevin McCarthy as Speaker.

Practically, though, the problem may end up being whether progressive Democrats are willing to vote for a deal that undermines increased tax enforcement, adds restrictions to social programs, and makes concessions to the fossil fuel industry. AOC and Senator Elizabeth Warren both remained uncharacteristically silent on the deal on Monday. Democrat House Leader Hakeem Jeffries tweeted, thankful that President Biden has reached an agreement in principle to prevent a devastating GOP manufacturer default. Looking forward to reviewing the legislative bill text once it's released this afternoon, and continuing our work to put people over politics. Chair of the 100-strong Congressional Progressive Caucus, Pramila Jayapal, hit out at the

work requirements for benefits policy, which found its way into the deal. Work requirements are bad policy, she wrote. They don't reduce spending. They create administrative burdens, and they simply don't work. The fact that this is a GOP priority is cruel, and every American should know what they're trying to do to poor and working families. Still, in spite of all of this, both President Biden and House Speaker McCarthy insisted on Monday that they have the votes to get the deal over the line. Reporting, however, indicated that Biden wasted no time beginning to work the phones, with one official claiming that cabinet members and senior White House on staff placed at least 60 calls to House Democrats in the early

hours of Monday morning. Biden spoke confidently to reporters yesterday, stating, I feel very good about it. There's no reason it shouldn't get done. Now, when it comes to the market's reaction, this agreement comes not a moment too soon. Earlier this month, Treasury Secretary Janet Yellen had forecast that the government could run out of cash by Thursday. Recent updates to this projection now indicate the government should be able to pay its bills until at least early next week. U.S. Treasuries rallied on Monday on low holiday weekend volume, with yields falling across all maturities to reflect reduced concern over a U.S. default. 10-to-30-year debt moderated coming off the two-month highs reached at the end of last week. The 10-year notes soften by more than 10 basis points, which is a significant move for longer-term

debt. The one-month Treasury bill, however, is trading at 5.5% rates, which still represents a 25-bases point risk premium over the federal funds rate. Still, that's much less concerning than the 5.7% that was reached on Friday. Concerns now turn to equities and other risk markets, where analysts worry that a deluge of fresh debt issuance could drain liquidity as the Treasury rapidly refills its accounts. Andrew Brenner, head of international fixed income at Nat Alliance Securities, said, it's going to be taking money out of the economy at the federal level. Current futures positioning indicates another leg down for long-dated treasury yield, suggesting the early stages of a flight to safety into long-term bonds.

Now, the Treasury typically targets half a trillion in cash holdings, but is now down to its last few tens of billions. How the Treasury goes about refilling its accounts is still an open question, and this is the particular piece that has people most concerned. The procedure of refilling those accounts could end up tightening liquidity conditions in a similar way to Fed quantitative tightening if it isn't conducted slowly and carefully. Think about it this way. If the Treasury is going from zero effectively to a half trillion in cash holdings, that half a trillion in cash holdings is coming out of the rest of the economy, hence tightening

liquidity conditions. And to get a sense of the scope of this, half a trillion dollars in cash is about the same amount the Fed has reduced its balance sheet by over the last year of quantitative tightening. Appearing on KitCo news, Lynn Alden warned that the Treasury could spark a liquidity crisis as it refills this cash stockpile. For the past six months, she said, the Treasury has actually been offsetting a lot of the Fed's tightening. The Treasury has been emptying their cash account into the financial system. If they want to refill their cash account back up to their target, then it's like a double negative for liquidity. They're joining the Fed and pulling liquidity out of the market. If things surprise in terms of how bad they'll get,

I think it will be because the Treasury does not manage that refilling process well. TXMC trades said something similar. Pay attention, they wrote, to how upcoming debt issuance is funded. If Yellen issues bills and money market funds leave reverse repo to buy them, it is liquidity neutral. If instead U.S. Treasury issues more duration, not bills, or if banks buy with reserves instead of money market funds, there is a higher risk of fragility. If cash stays in reverse repo, banks pay with reserves and the Fed is still running QT, you'd have two vacuums working in tandem to weaken systemic liquidity. Red flag for risk. For what it's worth, when the Treasury refilled its coffers last May, it was the banks who paid. Now it feels to me, it feels to me

like those short-term liquidity concerns are the most important things to keep an eye on, however. Many market commentators are also zooming out a bit farther. Reddit Group Wall Street Silver wrote, They didn't raise the debt ceiling by an amount. They set a new date of January 1, 2025. So technically, the debt ceiling is now unlimited for the next 19 months. They did this because actually having to agree to $36 trillion in the headlines would be impossible to pass. This means that during the next recession in 23 and 24, if tax revenues decline in spending increases, they can borrow an unlimited amount of money for the spending spree to reinflate the economy. Highlights how ridiculously fast the debt is growing.

Force these painful debates every six months. The Kobayisi letter writes, The most ironic part of the debt ceiling deal is that it will literally accelerate the federal debt crisis. With an uncapped debt ceiling for 19 months, there is unlimited borrowing capacity. Conservatively speaking, federal debt will cross 36 trillion by 2025. The debt ceiling deal will ironically add record levels of debt. Former member of Congress, Justin Amash, wrote, I've now reviewed the bill text of the debt ceiling deal, and it's actually worse than I imagined.

It locks in the inflated spending levels of recent years. Under McCarthy's deal, any incentive to cut spending for the rest of this term vanishes. Until January 2, 2025, the Treasury will now have unlimited authority to issue debt to finance commitments requiring payment. It's the ultimate kick the can down the road agreement. Putting it perhaps most simply of all was Ryan Selkis of Masari, who wrote, The Fed is going to print so much money, it's disgusting. Long Bitcoin and ETH. So let's take a step back and just try to sum this up.

First of all, the politics of the deal. This isn't a political show, so I don't want to get too deep into this. But this is very clearly a victory for the moderate wings of both parties. McCarthy is dragging along the GOP's Freedom Caucus, even if they kick and holler as they come. And especially if we see more defections from that caucus, it makes the people who are still screaming seem more marginalized on the outside. Same goes for the progressive wing the Democrats.

So far at least, it seems like that cohort is comfortable having the institutions like the Sierra Club make the big critiques rather than actually standing on their soapboxes themselves. Perhaps that's because they have a stronger sense of the importance of getting this deal done at basically any cost. Now, what about the actual short-term economic impact? I think fairly unsurprisingly, Lynn Alden has the right of it when she looks to the actual mechanics of how the Treasury coffers are going to be refilled. I think there is a real risk in which we go from a scenario in which extraordinary policies from the Treasury in order to offset default have been

offsetting quantitative tightening to a situation in which quantitative tightening and treasury coffer refilling are happening at the same time. If that is the case, we could have a scenario where any benefit to the mental condition of the markets is offset by just the change in liquidity conditions. Then, of course, there's the longer term, the argument that this is just kicking the can down the field. Obviously, I think many Bitcoiners will have extreme resonance with this position, and frankly, after watching this debate transpire, even if it was a short-term victory for the moderates, it's not exactly clear what the medium ground for this is going to be in terms of actually solving the underlying issues here. It continues to feel like we are in a prelude to some much more

seismic change kind of moment. So far, the big macro stories of 2023 have been bank failures and turbulence, and the U.S. government almost defaulting on its debt. It's a rough time, in other words, to be in the Fiat regime, and you've got to think that a lot of Bitcoiners are sleeping a little bit more soundly at night. Unfortunately, I think we will have all too many chances in the months to come to discuss what happens next. But for now, the deal is that a debt-sealing deal seems to have been reached, and so we can move on to the next thing.

Thanks as always for listening, and until tomorrow, be safe and take care of each other. Peace.