U.S. Treasury Secretary Steven Mnuchin on Wednesday urged Congress to raise the federal debt limit before lawmakers leave Washington for their August recess to avoid higher interest costs to taxpayers and market uncertainty about a potential default.
Mnuchin told a Senate Appropriations subcommittee that maintaining U.S. creditworthiness was of “utmost importance” and that the United States must pay its bills on time.
“As I’ve suggested in the past, based upon our best estimate at the time, we do have funding through September, but I have urged Congress to take this up before they leave for the recess,” Mnuchin said.
The last extension of the federal borrowing limit expired in March with total debt of around $20 trillion, but the Treasury has extended its ability to issue debt by employing extraordinary cash management measures, including deferring reinvestment in federal employee pension funds and suspending sales of savings bonds and debt instruments to state and local governments.
Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about “gray rhinos” — large and visible problems in the economy that are ignored until they start moving fast.
The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.
Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a “gray rhinoceros,” without naming specific companies.
Chinese regulators have become increasingly concerned that some of the biggest conglomerates have borrowed so much that they could pose risks to the financial system. Banking officials are ramping up scrutiny of companies’ balance sheets.
It won’t take much for the Federal Reserve to raise short-term interest rates too far, triggering an economic reversal making indebted students, corporations and other borrowers unable to repay loans, according to billionaire bond manager Bill Gross.
“Central bankers and indeed investors should view additional tightening and ‘normalizing’ of short-term rates with caution,” Gross, who runs the $2.1 billion Janus Henderson Global Unconstrained Bond Fund, said in an investment outlook published Thursday.
Treasury Department officials called bond traders and their advisers on Friday to assure them that the Trump administration isn’t considering prioritizing U.S. debt payments if Congress fails to increase the nation’s borrowing authority later this year, according to two people familiar with the matter.
The calls came after Bloomberg News published a story about worries among traders that Treasury Secretary Steven Mnuchin may have to employ a secret plan written by the Obama administration to make sure debt payments are made, potentially at the expense of salaries for government employees, payments to contractors and other obligations.
The Congressional Budget Office forecasts the federal government will hit its debt ceiling some time in October. Treasury Secretary Steven Mnuchin has urged Congress to increase the nation’s borrowing authority without brinkmanship, as in 2011 when a political showdown triggered the first downgrade of U.S. debt.
Legendary bankruptcy expert Dr. Edward Altman cautioned that this benign credit cycle — characterized by low default rates, low yields, low spreads, and lots of liquidity — could come to an abrupt end.
“It’s been a terrific market for investors for quite a long time and if anything is concerning it’s that we now are more than eight years into a benign credit cycle,” Altman, a professor at NYU Stern School of Business, told Yahoo Finance. “We’ve never had such a long benign cycle. And just that one little fact is something that we should be concerned about because if it comes to one and it could come to an end very dramatically.”
Altman, the creator of the financial-distress sniffing Altman Z-Score, warned in mid-2007 of a “Great Credit Bubble” and that there was going to be trouble in the market. He predicted that a meltdown would stem from corporate defaults. While the primary culprit of the financial crisis turned out to be mortgage-backed securities, investors who heeded Altman’s warning nevertheless avoided a lot of grief.
…Troublingly, Altman sees the reckless behavior of 2007 surfacing again.
Legendary investor Jim Rogers sat down with Business Insider CEO Henry Blodget on this week’s episode of “The Bottom Line.” Rogers predicts a market crash in the next few years, one that he says will rival anything he has seen in his lifetime.
It’s going to be the biggest in my lifetime and I’m older than you. No, it’s going to be serious stuff. We’ve had financial problems in America — let’s use America — every four to seven years, since the beginning of the republic. Well, it’s been over eight since the last one. This is the longest or second longest in recorded history, so it’s coming. And the next time it comes — you know, in 2008, we had a problem because of debt. Henry, the debt now — that debt is nothing compared to what’s happening now. In 2008, the Chinese had a lot of money saved for a rainy day. It started raining. They started spending the money. Now, even the Chinese have debt and the debt is much higher. The federal reserves, the central bank in America, the balance sheet is up over five times, since 2008. It’s going to be the worst in your lifetime, my lifetime too. Be worried. — Jim Rogers
PG View: Rogers sees this happening “later this year or next.” And while the Fed will attempt a rescue as they did in 2008, “this time it won’t work.”
After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover.
Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance.
PG View: Americans have essentially borrowed their prosperity from the future. The trouble is, when the future becomes the present, consumers reach a burden that won’t let them borrow any more and the severely cut back their consumption and the economy stalls.
Fewer subprime borrowers are paying off their auto loans early, a possible sign that consumers with weaker credit scores are struggling more, according to a report by Wells Fargo & Co. researchers.
Borrowers are making fewer extra payments on loans that were bundled into bonds in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells Fargo analysts led by John McElravey. The data on prepayments may offer another sign that subprime consumers are having more trouble paying their bills, the analysts wrote in a note dated Tuesday. Borrowers are already defaulting on a growing amount of auto debt.
Last decade, slower monthly payment rates on credit cards were an early sign of the consumer credit cycle changing for the worse, the analysts wrote.
Virtually every class of US debt — sovereign, corporate, unsecured household/personal, auto loans and student debt — is at record highs. Americans now owe $1tn in credit card debt, and a roughly equivalent amount of student loans and auto-loans which, like the subprime mortgage quality that set off the 2008 financial crisis, are of largely low credit quality (and therefore high risk).
US companies have added $7.8tn of debt since 2010 and their ability to cover interest payments is at its weakest since 2008, according to an April International Monetary Fund report. With total public and private debt obligations estimated at 350 per cent of gross domestic product, the US Congressional Budget Office has recently described the path of US debt (and deficits) as almost doubling over the next 30 years.
But this is not just a US phenomenon. Globally, the picture is similarly precarious, with debt stubbornly high in Europe, rising in Asia and surging across broader emerging markets. A decade on from the beginning of the financial crisis, the world has the makings of a fresh debt crisis.
PG View: It’s as if we learned absolutely nothing over the past 10-years.
Some economists have long warned that China faces the same fate as Japan, with a debt-fueled boom followed by years of stagnation as the country works its way through the hangover.
After Moody’s decision to downgrade China on Wednesday, the two countries at least now have sovereign credit ratings, at A1, to match.
…Concerns about China’s economy voiced by the likes of Moody’s have some echoes of the problems Japan faced by the early 1990s. As with Japan, heavy capital-spending levels have been central to China’s growth—investment accounted for nearly half of China’s annual growth by 2010, up from a third in 1990.
Moody’s Investors Service on Wednesday downgraded China’s credit rating to A1 from Aa3, changing its outlook to stable from negative, citing concerns efforts to support growth will spur debt growth across the economy.
Marie Diron, senior vice president for Moody’s soverign rating group, told CNBC’s “Street Signs” on Wednesday that the catalyst for the downgrade was a combination of factors, including expectations that potential growth would fall to 5 percent by the end of the decade. It was Moody’s first downgrade for the country since 1989, according to Reuters.
“Official growth targets are also moving down, but probably more slowly. So the economy is increasingly reliant on policy stimulus,” she said, adding that was likely to spur increasing debt levels for the government.
The New York Federal Reserve reports that household debt across the nation has hit a dubious milestone in the first quarter: It surpassed the peak debt level of 2008 at $12.7 trillion.
…Credit-card delinquencies crept up and student-loan delinquencies remain stubbornly high in the low double digits. Delinquencies in the $1.2 trillion auto-loan market were down a bit, but they bear watching after a steady rise since 2012.
To appreciate just how important the Federal Reserve has been to the U.S. Treasury, consider this simple fact: It alone financed roughly 40 percent of America’s budget deficit last year.
So as Fed officials talk up the possibility of unwinding the central bank’s crisis-era bond holdings later this year, figuring out what will happen when the U.S. loses its biggest source of funding has become a pressing concern.
PG View: This is why I think talk of balance sheet normalization is nothing more than hawkish jawboning, particularly in light of the fact that foreign buyers of Treasuries are pulling back.
Millions of U.S. parents have taken out loans from the government to help their children pay for college. Now a crushing bill is coming due.
Hundreds of thousands have tumbled into delinquency and default. In the process, many have delayed retirement, put off health expenses and lost portions of Social Security checks and tax refunds to their lender, the federal government.
Student loans made through parents come from an Education Department program called Parent Plus, which has loans outstanding to more than three million Americans. The problem is the government asks almost nothing about its borrowers’ incomes, existing debts, savings, credit scores or ability to repay. Then it extends loans that are nearly impossible to extinguish in bankruptcy if borrowers fall on hard times.
…Roughly eight million Americans owing $137 billion are at least 360 days delinquent on federal student loans, nearly the number of homeowners who lost their homes because of the housing crisis. More than three million others owing $88 billion have fallen at least a month behind or have been granted temporary reprieves on payments because of financial distress.
A debt binge has left a quarter of US corporate assets vulnerable to a sudden increase in interest rates, the International Monetary Fund has warned.
The ability of companies to cover interest payments is at its weakest since the 2008 financial crisis, according to one measure.
The IMF’s twice-yearly Global Financial Stability Report released on Wednesday highlights what economists at the fund see as one of the main risks facing President Donald Trump and his plans to boost US growth via a combination of tax cuts and infrastructure spending.
Before the holiday weekend begins, best-selling author James Rickards joins Olivia Bono-Voznenko outside the NYSE to talk all about the markets and his latest book, “The Road to Ruin.” Jim discusses the currency wars, Trump’s turnaround on China & the Fed and an inevitable crisis amid a weak system.
“Have 10% of your investable assets in [physical] gold.” — James G. Rickards
The U.S. annual budget deficit remained near its highest level in three years during March amid flat government revenues and higher federal spending.
Federal spending exceeded revenue by $176.2 billion last month, the Treasury Department said Wednesday. The budget gap was about $68.2 billion higher than a year ago. Through the first six months of the fiscal year, the deficit was about 15% wider compared with the same period a year earlier.
If something cannot go on forever, it will stop.” This is “Stein’s law”, after its inventor Herbert Stein, chairman of the Council of Economic Advisers under Richard Nixon. Rüdiger Dornbusch, a US-based German economist, added: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
These quotations help us think about the macroeconomics of China’s economy. Growth at rates targeted by the government requires a rapid rise in the ratio of debt to gross domestic product. This cannot continue forever. So it will stop. Yet, since the Chinese government controls the financial system, it can continue for a long time. But the longer the ending is postponed, the greater the likelihood of a crisis, a big slowdown in growth, or both.
I have argued that it is in the interests of China and the rest of the world to keep their financial systems separate. The rapid growth of indebtedness and the size of its financial system represent a threat to global stability. China needs to rebalance its economy and stabilise its financial system before opening up capital flows. Western financiers will have a different view. We should ignore this sectional interest.
Twenty years after the Asian financial crisis and a decade since the global credit crunch, the region is swimming in debt.
The debt binge is spread across companies, banks, governments and households and is inflating bubbles in everything from the price of steel rebar in Shanghai to property prices in Sydney. As the Federal Reserve raises borrowing costs, that means debt is again a concern.
…Still, the pace of borrowing is eye watering. A debt hangover in Asia matters because the region is the biggest contributor to global growth.
One of the great mysteries and biggest concerns in the economy right now is the slowing growth in bank lending. Economists are searching for answers but none are entirely satisfying.
Total loans and leases extended by commercial banks in the U.S. this year were up just 3.8% from a year earlier as of March 29, according to the latest Federal Reserve data. That compares with 6.4% growth in all of last year, and a 7.6% pace as of late October.
The slowdown is more surprising given the rise in business and consumer confidence since the election. And it is worrisome because the lack of business investment is considered an important reason why economic growth has remained weak.
U.S. debt is likely to double as a share of the economy over the next 30 years, according to the Congressional Budget Office.
Considering President Trump’s push for big tax cuts and a promise not to touch key drivers of the debt, the picture could worsen.
Right now the nation’s debt amounts to 77% of GDP. That’s already the highest level since the post-World War II era. If current law remains in effect, it’s on track to jump to 150% by 2047, according to the latest long-term budget projections from the CBO.
…Interest on the debt, meanwhile, will almost quadruple — from 1.4% today to 6.2% by 2047. That’s due to rising rates and the growing pile of borrowed money.
PG View: This has been a major driver for gold for decades and clearly it’s going to continue for decades . . .
Government debt and budget deficits are both set to spiral higher in the coming three decades if current patterns hold, according to new projections released Thursday by the Congressional Budget Office.
Due largely to increases in Medicare and Social Security, federal debt will reach 150 percent of gross domestic product in 2047, the CBO report said.
The total current debt held by the public of $14.3 trillion is 77 percent of GDP. The current total debt level of $18.8 trillion is about 101 percent of GDP (the CBO computes debt to GDP based on public debt).
The U.S. hit its again on Thursday — a whopping $19.9 trillion this time — and the Treasury Department started using accounting maneuvers to buy several months to raise it to avoid a potential federal government default.
The statutory limit on borrowing has become a partisan flash point in recent years. During the Obama administration, conservatives in Congress tried unsuccessfully to include spending cuts with any debt increases.
Euphoria has been pervasive in the stock market since the election. But investors seem to be overlooking the risk of a U.S. government default resulting from a failure by Congress to raise the debt ceiling. The possibility is greater than anyone seems to realize, even with a supposedly unified government.
…The Republican Party is already facing a revolt on its right flank over its failure to offer a clean repeal of the Affordable Care Act. Many members of this resistance constitute the ultra-right “Freedom Caucus,” which was willing to stand its ground during previous debt ceiling showdowns. The Freedom Caucus has 29 members, which means there might be only 208 votes to raise the ceiling. (It’s interesting to recall that, in 2013, President Trump himself tweeted that he was “embarrassed” that Republicans had voted to extend the ceiling.)
Treasury Secretary Steven Mnuchin has raised the alarm on the U.S. debt ceiling, and Republican leaders insist they won’t push it to the limit as in past years by using it as a bargaining chip for deep spending cuts.
President Donald Trump hasn’t weighed in recently, but both he and his hawkish budget chief have criticized Republicans in the past for being too willing to raise the debt limit — a statutory cap on how much money the U.S. can borrow — and may be more willing than previous administrations to threaten a default.
According to the International Monetary Fund, global debt has grown to a staggering grand total of 152 trillion dollars. Other estimates put that figure closer to 200 trillion dollars, but for the purposes of this article let’s use the more conservative number. If you take 152 trillion dollars and divide it by the seven billion people living on the planet, you get $21,714, which would be the share of that debt for every man, woman and child in the world if it was divided up equally.
…We are living during the greatest debt bubble in the history of the world, and our financial engineers have got to keep figuring out ways to keep it growing much faster than global GDP because if it ever stops growing it will burst and destroy the entire global financial system.
Central banks attempt to walk this fine line – generating mild credit growth that matches nominal GDP growth – and keeping the cost of the credit at a yield that is not too high, nor too low, but just right. Janet Yellen is a modern day Goldilocks.
How is she doing? So far, so good, I suppose. While the recovery has been weak by historical standards, banks and corporations have recapitalized, job growth has been steady and importantly – at least to the Fed – markets are in record territory, suggesting happier days ahead. But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault. It happened in 2008, and central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. Today, central bank flexibility is not what it was back then. Yields globally are near zero and in many cases, negative. Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce.
I’m with Will Rogers. Don’t be allured by the Trump mirage of 3-4% growth and the magical benefits of tax cuts and deregulation. The U.S. and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond.
PG View: Gross makes a good point about being more concerned about capital preservation. Although he doesn’t mention it specifically, one of the best assets for accomplishing that task is gold.
Treasury Secretary Steven Mnuchin sent a letter this week to Congress warning that the United States is about to reach its legal borrowing limit by next Thursday.
That’s because the current debt ceiling suspension expires at the end of Wednesday, March 15.
Since Congress will almost certainly not act in time to raise the ceiling or extend the suspension, Mnuchin will have to start an official juggling act to ensure the country can continue to keep paying all its bills in full and on time. After the current suspension expires, the debt ceiling should reset a little north of $20 trillion next Thursday.
PG View: Adding to the fun is the timing: The debt ceiling will be reinstated on the same day that the Fed announces policy, which will likely include a rate hike.