Issue 5 - The Curse of Debt Ceiling
A couple of days back, US Treasury secretary Janet Yellen said that the US federal government is likely to run out of cash by October 18th. Twister Bob had called this out back in August! Read along..
We are all familiar with how a reserve currency works, right? You have an underlying reserve commodity (primarily Gold) you store it and you issue your own currency the value of which should not go beyond your reserves. So far so good..well not really
2/
The reserve currency system is a thing of the past. No one follows the system anymore. Remember when Richard Nixon abolished the gold standard in 1970? Well, that was the end of that.
3/
So does it mean that jewelry hoarded by Indian mums or DJ Khaled are worthless? Not exactly. But here's when the things start getting a little bit trickier
4/
People still think gold as a store of value and they are right in doing that as the second most popular store of value - USD, is in danger.
5/
Here comes the part for which I was created - to explain.
To understand why USD is in danger we need to understand what the hell is the debt ceiling and we do we see a lot of buzz around it lately vis-a-vis the US government
7/
Debt ceiling is like your credit limit sanctioned by bank. For US government, it is a limit set by congress to limit how much money the government can borrow.
8/
Fun fact: It has gone 5X in last 20 years!
It must be highlighted that this limit is important because being unable to pay back money borrowed from the public has ugly consequences. Case in point India's DHFL.
9/
The idea of having a limit is that once the limit is reached, lawmakers must raise or suspend the ceiling before the Treasury Department can issue more debt. As the finance version of Bob Marley would have sung “Mo debt mo cry” and the treasury knows it.
11/
Here’s some history for you. Before World War I, Congress approved borrowing for specific purposes, but over the next two decades, it granted more flexibility to the Treasury to issue bonds without individual, explicit legislation.
12/
By 1939, Congress effectively established an aggregate limit that delegated to the Treasury the ability to borrow up to a certain amount. The limit has been raised or modified 98 times so far, according to the Congressional Research Service.
13/
Under the Trump administration the debt ceiling was suspended. Congress voted in July'19 to suspend the debt limit until 31st July '21, after which the prior limit of $22 trillion would be reset to include any new borrowing in the interim years.
14/
On Aug. 1, the limit was reinstated at around $28.5 trillion, a figure that includes debt held by the public and debt held by government agencies. After that, the Treasury will no longer be able to tap bond markets to raise new cash.
15/
Weird thing about this is, US Treasury says that they will take extraordinary measures to conserve cash so they can pay all the necessary expenses to keep the machine running.
16/
By this what they actually mean is just interest payment on already borrowed debt. If they default on these payments, it will be very unsettling for the financial markets.
17/
While treasury is confident that they will sail through this gale, there’s a different set of economist groups who say that those so-called extraordinary measures will allow Treasury to pay off the government’s bills without floating new debt for two to three months.
18/
After that, Congress will need to either raise or suspend the borrowing limit or risk the U.S. defaulting on its obligations.
Next 3 months are going to be super exciting time to see who wins but it seems we already have a winner-cryptocurrency
19/
