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Economic Outlook: US debt: a ticking timebomb

Economic Outlook: US debt: a ticking timebomb
September 7, 2017
Economic Outlook: US debt: a ticking timebomb

The situation is not a new one, having occurred in 2011 and 2013, and in 2011 the situation went right down to the wire before an increase was authorised, while in 2013 there was a 16-day Federal shutdown. The latest situation comes at an awkward time because as one of the biggest buyers of US government debt, the Federal Reserve, has hinted that the time has come to prune its balance sheet and wind back its Treasury bill purchases. That is likely to be put on hold until debt markets are free of uncertainty.

Reaching a solution might take some time because within the Republican Party there are pressure groups that are unlikely to give their blessing to any rise in the debt ceiling without getting something in return. So what happens if President Trump calls all the bluffs and allows a financial shutdown? In 2011, the delay in raising the debt ceiling had some immediate and unpleasant consequences. First to go was the US credit rating suffering its first ever downgrading. This was followed by a significant fall in equity markets and higher borrowing costs as lenders demanded a greater risk premium. The obvious way out is to reduce the spending bill, but even that would attract fierce opposition, notably from the Democrats, while the big corporations would also lobby hard if there were any attack on their vested interests.

It seems likely that some sort of fudge will be arrived at. President Trump has been putting pressure on Congress to agree funding for his border wall, but all bets seem to be off in the wake of the hurricane in Texas, which will require substantial Federal aid, and any delays in solving the budget deficit could affect funding any relief effort.

 

Next week’s economics…

Among a whole host of economic data due for release in the UK next week, inflation is likely to be among the most closely watched indicators. The retail price index reading is due for release on Tuesday, having risen by slightly more than expected in July to a year-on-year rate of 3.6 per cent. This takes on a greater importance because on Thursday the Bank of England’s Monetary Policy Committee meets to decide on what to do with interest rates. The August meeting showed two committee members voting for a rise in rates while the remaining six voted to leave rates unchanged. It is 10 years since the Bank raised rates, and it would not be unusual for people to forget that the Bank always runs the risk of falling behind the curve in an attempt to curb inflation, rather than acting pro-actively. However, inflation at the moment is largely a by-product of cost inflation and less the result of a supply/demand imbalance pushing prices higher. And as estimates on economic growth – currently rather weak – are very much a hostage to fortune as the Brexit process drags on, it may not yet be the time to see how well the economy can cope with a rise in borrowing costs. It’s also worth remembering that sterling is now higher against the dollar than it was in the wake of the referendum result, so the cost of currency-related imported inflation should now be less. However, there may be pressure building on the employment side, where an increasingly tight labour market could put upward pressure on wage inflation.