Speaker 1: Hello, and welcome to another episode of the ad Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and Joe uh debt ceiling. Oh, I'm
Speaker 1: so excited we're doing a trillion dollar coin episode. I
Speaker 1: knew you were going to say that and to annoy me. Yes,
Speaker 1: this is not an episode on the trillion dollar coin.
Speaker 1: If you are interested in that particular piece of um
Speaker 1: finance thought experiment, you can check out our previous episode
Speaker 1: on the topic. I think it was over an hour long,
Speaker 1: all about the trillion dollar coin. Yeah, okay, check out
Speaker 1: that episode if you want to talk about the trillion
Speaker 1: dollar coin. But today we're going to be discussing something
Speaker 1: slightly different. We are going to be talking about what
Speaker 1: exactly happens if the US actually does default, right, because
Speaker 1: if there's like just a lot of uncertainty about this
Speaker 1: question of like okay, like what happens if they don't
Speaker 1: raise the dead ceiling? And what are the constraints, what
Speaker 1: are the various things that could happen, Like how bad
Speaker 1: would it be if we actually, like didn't pay the debt?
Speaker 1: Does the White House have ability to pay some debt
Speaker 1: but not others? Like it's pretty uncertain, Like it seems
Speaker 1: bad right, like it is lame and defaulting was bad.
Speaker 1: Russia default was bad, and Russia is like this like tiny?
Speaker 1: You know how big was russia debt nothing? So like
Speaker 1: it is a moving feast of uncertainty, like a twirling
Speaker 1: whirlwind of chaos and uncertainty and open questions over exactly
Speaker 1: what happens. And there are all these moving parts. I
Speaker 1: think we really need to sit down and discuss them
Speaker 1: and kind of talk about it in an almost sequential way,
Speaker 1: like this is what happens if this happens, and then
Speaker 1: that happens. So we really do have the perfect guest
Speaker 1: for this. We're going to be speaking with Joe Perks
Speaker 1: and add thoughts favorite of course, he is also global
Speaker 1: macro strategist over at Bespoke Investment Groups. So George, thank
Speaker 1: you so much for coming back on all thoughts. Hey all,
Speaker 1: thanks for having me. Let's start with the basics, since
Speaker 1: we're talking about this as a sort of primer episode
Speaker 1: on the debt ceiling and the debt limit. When we
Speaker 1: talk about limits on US debt, what do we mean exactly?
Speaker 1: So the US is really unique in a very frustrating
Speaker 1: way in that not only do we have restraints on
Speaker 1: spending in terms of Congress authorizing and the President signing
Speaker 1: into law bills that create government spending um and then
Speaker 1: appropriations processes after that, you know, throughout the year, we
Speaker 1: also have this break on the total amount of debt
Speaker 1: that can be issued. So Congress can at the same
Speaker 1: time instruct the government bureaucracies to go out and spend money,
Speaker 1: but at the same time say, oh, well, you can't
Speaker 1: actually issue debt to you that spending we've told you
Speaker 1: to do. And oh, by the way, you can't collect
Speaker 1: anymore in taxes because we also control that and we've
Speaker 1: told you the amount you can collect in taxes. So
Speaker 1: it's this contradiction in terms of instructions to the executive
Speaker 1: branch and to various federal government bureaucracies from Congress and
Speaker 1: from the President, and it's it's a thing that's been
Speaker 1: around in US politics for a long time. But you know,
Speaker 1: I think the most important thing to understand about it
Speaker 1: is that it's just it's nonsensical. It doesn't make sense
Speaker 1: for there to be this extra restraint on top of
Speaker 1: the existing safeguards against you know, in a representative democracy
Speaker 1: where people are elected and then they authorize the spending
Speaker 1: on behalf of the population. We also have this thing
Speaker 1: where there's a debt, there's a debt limit that that
Speaker 1: serves as sort of a secondary veto point on government spending.
Speaker 1: Defenders of the debt ceiling law would say, look, kind
Speaker 1: of that's true, but it is good to have this
Speaker 1: debate every couple of years about our level of indebtedness.
Speaker 1: This can be used as a break of sorts for
Speaker 1: or constraining spending. In the Dead Ceiling fight, there really
Speaker 1: was cuts and the cuts to the growth of federal spending.
Speaker 1: You know, you're saying, like, okay, like this is like
Speaker 1: the sort of like maddening law makes no sense. Does
Speaker 1: the dead ceiling have a history of like being used
Speaker 1: to sort of regroup and retrain our thoughts about how
Speaker 1: much we're spending. The short answer is no. And I
Speaker 1: think that the more consistent way to think about it
Speaker 1: historically is that it's used by one factionum or another
Speaker 1: in US politics against whoever happens to sort of be
Speaker 1: the party in control. So you know, this is this
Speaker 1: is a bi partisan thing. It's used both ways. Both
Speaker 1: parties have declined to get rid of the dead ceiling
Speaker 1: on a permanent basis when they've been empowered. So I
Speaker 1: don't mean to say that this is a red versus
Speaker 1: blue you know, one side an abuser of this versus
Speaker 1: the other. But what it does is it just it
Speaker 1: creates a veto point and allows the legislative minority to
Speaker 1: extract what it wants from or some of what it
Speaker 1: wants from the legislative majority. Now that's not necessarily the
Speaker 1: end of the w old, but there are a couple
Speaker 1: of things to think about here. First, the U S
Speaker 1: system of government is already full of veto points, right,
Speaker 1: whether it's process of buils through committees, process of builds
Speaker 1: through the House, process of builds through the Senate, judicial
Speaker 1: checks on all that, the executive branch, the high requirement
Speaker 1: in the Senate to sign things in the law. There
Speaker 1: are some exceptions, but basically you need a supermajority in
Speaker 1: the Senate to get things signed in the law. So
Speaker 1: there's just we have a replete number of veto points,
Speaker 1: adding you know, just one more. The benefits are pretty
Speaker 1: negligible even if you agree that that. You know, controlling
Speaker 1: the debts size is a super important public policy goal.
Speaker 1: I don't happen to agree with that, but let's take
Speaker 1: that as given. Even then, there are costs associated with
Speaker 1: this that that are very real. And the cost is
Speaker 1: the credibility of the U. S is ability to pay
Speaker 1: its debts on time in full. And you know, there
Speaker 1: are real questions about the United States Treasuries ability to
Speaker 1: settle out coupon and interest payments on debt, let alone,
Speaker 1: payments to Social Security recipients, payments to government contractors, government employeescetera, etcetera.
Speaker 1: This year because of this death ceiling being present. And
Speaker 1: again I think it's really important to emphasize debt ceiling
Speaker 1: being present. Even though those payments, all those payments that
Speaker 1: are set to go out, all the spending, all the
Speaker 1: payments that are set to come into the treasury and
Speaker 1: formed taxes, all of that has already been approved by Congress.
Speaker 1: The debt ceiling is a secondary approval's process that has
Speaker 1: nothing to do with keeping a lid on on spending
Speaker 1: in a direct sense. So, George, you you just set
Speaker 1: out the stakes kind of perfectly there. But talk to us.
Speaker 1: You also mentioned the treasury. Talk to us about extraordinary measures,
Speaker 1: because the U. S. Treasury has already said that it's
Speaker 1: started to take these extraordinary measures in order to meet
Speaker 1: its obligations because we have in fact already exceeded that
Speaker 1: thirty one point four trillion dollar or whatever it is
Speaker 1: borrowing limit. What are the extraordinary measures and how do
Speaker 1: they actually play out here? So there are a variety
Speaker 1: of things that go into the extraordinary measures behind the scenes.
Speaker 1: I mean, the simplest way to think about it is
Speaker 1: changing timing of payments and sort of where there's flexibility
Speaker 1: to defer payments or to pay them, you know, without
Speaker 1: issuing debts, to wait for new payments to new tax
Speaker 1: payments to come in before sending out existing payments. That's
Speaker 1: one way to think about it. The most important thing, though,
Speaker 1: is spending down the balance that's recorded in the Treasury
Speaker 1: General account at the Federal Reserve. So the Federal Reserve
Speaker 1: is the United States Treasuries fiscal agent, which basically means
Speaker 1: that that payments are being made via the feed. So
Speaker 1: if you're if you're the Treasury, you don't have a
Speaker 1: checking account at a private bank. You have a checking
Speaker 1: account at the Fed. There are ways in which the
Speaker 1: government is nothing like household, but in terms of access
Speaker 1: to a checking account, that is one way the government
Speaker 1: is like a household. There is a account at the
Speaker 1: Fed again called the Treasury General Account that is essentially
Speaker 1: a cash balance, a balance available for payments that is
Speaker 1: used to settle payments owed by the Treasury to other
Speaker 1: individuals or entities throughout the economy. And what the Treasury
Speaker 1: has been able to do since whether they're able to
Speaker 1: do it beforehand, but what if they've done as a
Speaker 1: matter of course since, is build up this this Treasure
Speaker 1: General Account in the period leading up to debt ceiling
Speaker 1: limits being reached, because that allows for flexibility over the
Speaker 1: subsequent months. Basically, if you know that you're going to
Speaker 1: be without a paycheck for a couple of months, you
Speaker 1: save some cash away and your checking account. You're not
Speaker 1: going to buy a long term investment with it because
Speaker 1: you know you'll need it, but you'll have a little
Speaker 1: balance in your checking account, and then when your paycheck
Speaker 1: doesn't come through, you can still pay your rent for
Speaker 1: a couple of months. You can't do it indefinitely, but
Speaker 1: you have this sort of cushion there, and that's sort
Speaker 1: of what the charge of General Account spend down is
Speaker 1: and that's the core of extraordinary measures that that allows
Speaker 1: the Treasury to continue to make all the payments it's
Speaker 1: mandated to buy law, you know, whether that's UH payments
Speaker 1: to contractors, payments to employees, payments to beneficiaries, whatever, payments
Speaker 1: to holders of the national debt. All those can continue
Speaker 1: to go out the door as normal, in part because
Speaker 1: there's this cash balance at the t g A that's
Speaker 1: being spent down. Okay, we have these sort of like
Speaker 1: they're called extraordinary measures, but they're not like that weird.
Speaker 1: They're like little like they're more like, you know, short
Speaker 1: term cash management techniques that allow the government to make
Speaker 1: its obligations for a few extra months. Let's talk about like, okay,
Speaker 1: when those run out, what happens? Like where where do
Speaker 1: things stand? You know? People talk, I don't know, like
Speaker 1: what is your estimate for when like the sort of
Speaker 1: real debt limit is right when we no longer have
Speaker 1: these sort of drop dead Yeah, so the X date
Speaker 1: the drop dead date? Talk about like what happens as
Speaker 1: we get closer to that. I so, I personally don't
Speaker 1: think my estimate is any better than what we've heard
Speaker 1: from charity or from the Secretary Treasury yelling, she says
Speaker 1: June five, this sort of her best estimate, but one,
Speaker 1: It's important to understand that she described it as having
Speaker 1: considerable uncertainty. So, for instance, if we have a really
Speaker 1: really strong tax collection season or really really weak tax
Speaker 1: collection season over the next three months, that's going to
Speaker 1: have big implications for the timing here, right, just because
Speaker 1: a huge percentage of cash flows in and out of
Speaker 1: the Treasury take lace over over tax season. So you know,
Speaker 1: there's just all sorts of uncertainties. Also, private sector of
Speaker 1: visibility is is not great into all the timing of
Speaker 1: payments in there and their size. So I'll just make
Speaker 1: that you know, I think sometime in May June is
Speaker 1: probably the right way to think about it. Um, late mate,
Speaker 1: early June, we'll we'll hit this drop dead day where
Speaker 1: essentially there are more payments being requested from the Treasury
Speaker 1: than there is cash balance plus payments being made to
Speaker 1: the Treasury. At that point, I think it's important to
Speaker 1: stress that we don't actually know what's going to happen.
Speaker 1: Nobody knows. There may be Treasury bureaucrats somewhere that know, um,
Speaker 1: but for all intents and purposes, they're they're not saying anything,
Speaker 1: and we we can't really be sure the I think
Speaker 1: the most popular in terms of like people saying, well,
Speaker 1: why don't you just do this option is something called prioritization,
Speaker 1: which is to make some payments and not others. So
Speaker 1: what does that look like? For instance, if the Treasury
Speaker 1: sees that they have a payment due to the holder
Speaker 1: of a long term Treasury bond, they will make that
Speaker 1: coupon payment, but they won't necessarily make a payment to,
Speaker 1: for instance, employees of the federal government for their paycheck.
Speaker 1: How you assign a matrix of sort of like who
Speaker 1: gets paid and who doesn't get paid in that scenario
Speaker 1: is a super fraught political question that deserves a lot
Speaker 1: of discussion. It's all hypothetical because the Treasury has said, well,
Speaker 1: we can't actually do this, We don't have the technical
Speaker 1: abilities to do this. Now, they may be bluffing when
Speaker 1: they say that one way to sort of get a
Speaker 1: better outcome around the death ceiling from the Treasury's perspective,
Speaker 1: because if you're the bureaucrats of the Treasury, what you
Speaker 1: care about is just being able to do what Congress
Speaker 1: has told you to do in terms of making payments
Speaker 1: in and out of the Treasure General account. You don't
Speaker 1: really care about the political fight. You just want to
Speaker 1: do your job, and from that perspective, Treasury has signaled
Speaker 1: quite aggressively, Look, we cannot do prioritization. So if if
Speaker 1: we hit the X date, then we're not gonna be
Speaker 1: able to say, oh, make this payment but not that payment.
Speaker 1: Whether that's true or whether that's sort of signaling in
Speaker 1: a game that makes default very very costly for whoever
Speaker 1: lets it happen is an unclear thing, like like one.
Speaker 1: One possible explanation is that Treasury is saying that as
Speaker 1: a way to signal to, for instance, congressional Republicans that hey,
Speaker 1: y'all can't do this or it's gonna be really really bad.
Speaker 1: If Treasury is being honest around prioritization, and again I
Speaker 1: don't have any insight, and you know, I don't have
Speaker 1: a way to say like, oh, they're not being honest,
Speaker 1: but it's definitely possible that they're. They're sort of presenting
Speaker 1: a reality that's a little bit less the case than
Speaker 1: is other than than it really is. But assuming they're
Speaker 1: being honest, then when Treasury runs out of cash, you
Speaker 1: come to this second scenario called a general default, and
Speaker 1: that is basically saying we're not going to make any
Speaker 1: payments to anybody because everyone's on an equal footing. We
Speaker 1: can't tell payments apart, and we are just not going
Speaker 1: to make payments until the debt ceiling is lifted. That
Speaker 1: would be enormously disruptive and would obviously involve an outright
Speaker 1: default on certain US securities. There would probably be make goals,
Speaker 1: but there would be a default. There would also be
Speaker 1: a default on everything from Social Security checks to government
Speaker 1: employe paychecks. The military wouldn't get paid, Military contractors don't
Speaker 1: get paid, any government contractor would get paid. Cash out
Speaker 1: of the Treasury would entirely stop. So I think in
Speaker 1: terms of the first two options around like what Treasury
Speaker 1: can do in terms of making payments, like the rest
Speaker 1: pull in terms of making payments, those are the two extremes.
Speaker 1: Absolute prioritization would be they have this matrix of different
Speaker 1: priorities and they make them as they're able to, and
Speaker 1: some people don't get the payments their owned, but Treasury
Speaker 1: is able to finally tune that to like reflect what
Speaker 1: they want to do. That's one spectrum, and the other
Speaker 1: spectrum is general fault. Nobody gets anything until the debt
Speaker 1: gets a little bit, so Obviously, general default of the
Speaker 1: US sounds very, very bad and dire. But one of
Speaker 1: the things we've seen in previous debt ceiling dramas is
Speaker 1: that as we get closer and closer to that prospect,
Speaker 1: we tend to see market participants buying US government debt
Speaker 1: as a sort of flight to safety play. So what
Speaker 1: would it mean for the actual treasury market if we
Speaker 1: got to that general default point? What would you expect
Speaker 1: to see? Well, that is where things get really fun,
Speaker 1: because you have to sort of competing definitions of fund
Speaker 1: may vary. Fund may not apply to the non exactly.
Speaker 1: So on the one hand, any missed payment on something
Speaker 1: that is assumed as a just a general functioning bedrock
Speaker 1: principle of financial markets to never miss payments, whether it's
Speaker 1: principal or khun having a miss payment on that creates
Speaker 1: all sorts of headaches. Not only is are are you
Speaker 1: maybe creating four sellers of people who are not allowed
Speaker 1: to hold securities that have defaulted? And we can come
Speaker 1: back to that later, but let's assume that there's some
Speaker 1: segment of the market that says we're not allowed to
Speaker 1: hold these. We we we just can't be seen holding these,
Speaker 1: So we have to sell them. On the other hand,
Speaker 1: some segment of the market would say, look, this is
Speaker 1: a political fight. It's not a it's not a lack
Speaker 1: of ability to pay, it's a lack of willingness to pay.
Speaker 1: That's going to be temporary. So we will accept some
Speaker 1: trivial risk premium to hold these securities because at some
Speaker 1: point we trust that we're gonna be made whole. You know,
Speaker 1: we might lose a little bit, but but you know
Speaker 1: we're going to be paid something for holding these defaulted
Speaker 1: securities in the meantime, so we'll hold onto those. So
Speaker 1: figuring out who has these securities, who has to sell them,
Speaker 1: who wants to sell them, what prices there the people
Speaker 1: who want to sell them are willing to trade at
Speaker 1: versus the other side of the of the demand for
Speaker 1: these of ALTI securities by people with a little bit
Speaker 1: looser risk tolerance. That's going to be a really there's
Speaker 1: been a lot of volatility. As those securities work themselves out,
Speaker 1: there will be a series of bills around the debt
Speaker 1: ceiling maturity or around the debt ceiling X state that
Speaker 1: will be probably the most impacted relative to their historical volatility. Bills.
Speaker 1: Remember don't pay coop on payments, so you know, your
Speaker 1: whole payment of interest comes with the maturity of the bill,
Speaker 1: So you know, as a percentage of of your total
Speaker 1: cash flow for the instrument, bills are going to be
Speaker 1: a lot more impacted. And they're also much less volatile historically,
Speaker 1: so you know, if you if you see for selling,
Speaker 1: you can see sort of more outside moves in those
Speaker 1: in those word are typically much safer, less volatile securities.
Speaker 1: On the other hand, you've got notes, bonds, notes and
Speaker 1: bonds which are longer term. You know, if you're thinking
Speaker 1: about a third year bond, one missed coupon payment, that
Speaker 1: that you know you probably get paid back in cash
Speaker 1: a month later. It doesn't really matter as much to
Speaker 1: the to the total value of the security. So it's
Speaker 1: plausible that you see long term securities that miss coupon
Speaker 1: payments during that period outperform the front end of the
Speaker 1: Yolker or or or or fall. You know how their
Speaker 1: yields fall, prices go up in absolute terms because of
Speaker 1: general risk of version. Now there's also a scenario here
Speaker 1: where and we're sort of getting far out into hypotheticals
Speaker 1: without really stressing what are our metrics for like this
Speaker 1: scenario are But there's also a scenario here where basically
Speaker 1: there isn't much change in the treasury market because the
Speaker 1: people who are willing to pay more and the people
Speaker 1: who are forced to sell or want to sell are
Speaker 1: relatively evenly matched, and everything kind of just trades out
Speaker 1: at equilibrium levels. That's a very real possibility, is it
Speaker 1: my expectation? Probably not, But like it's it's something you
Speaker 1: have to think about. So one of the things that
Speaker 1: makes treasuries special is that they are used for collateral
Speaker 1: in the repo market. So you know, if you're loaning
Speaker 1: or borrowing a large amount of money, you will often
Speaker 1: use treasury securities as your collateral slash security in order
Speaker 1: to do that. What would be the impact on the
Speaker 1: repo market if you had doubts over whether or not
Speaker 1: some of these bonds are in default or are in
Speaker 1: fact going to be receiving their coupon payments on schedule.
Speaker 1: I think it's probably best to think about the repo
Speaker 1: markets an extension of the cash treasury market from that perspective,
Speaker 1: And in this scenario, I think there will be some
Speaker 1: repo market makers who are willing and able to take
Speaker 1: quote unquote defaulted treasuries as collateral and maybe apply some
Speaker 1: small haircut to them, but are willing to do it
Speaker 1: for a relatively small increase in their income from from
Speaker 1: the activity. You know, just like there will be people
Speaker 1: who will be willing to pay, you know, slightly less
Speaker 1: than than typical for for a similar security because it's defaulted.
Speaker 1: But but not like you know half as much, you
Speaker 1: know that kind of thing. But we don't really know
Speaker 1: the other thing, and I think this affects both the
Speaker 1: repo market and the cash market is we don't really
Speaker 1: know how well the back end settlement systems and trading
Speaker 1: systems are going to handle being able to trade something
Speaker 1: that's already past maturity right like and hopefully their QA
Speaker 1: and DEV people at banks and at funds and at
Speaker 1: other providers who are thinking about this and have have
Speaker 1: tested this. But what happens if I have to buy
Speaker 1: on recording this February ninth? What happens if I have
Speaker 1: to buy on February ninth a bill that shows that
Speaker 1: that has a maturity data associated with it a February seven?
Speaker 1: Can the systems even accept that? Or it does it
Speaker 1: throw an error and say no, you're not allowed to
Speaker 1: do that. I'm so glad you brought this up because
Speaker 1: this is something I've wondered about exactly, which is that
Speaker 1: with most financial instruments, when we're talking about default, you know,
Speaker 1: it's just like it's kind of an economic question, well
Speaker 1: what's there when you're going to get your recovery, etcetera.
Speaker 1: And I've always wondered whether like a US debt default,
Speaker 1: like would it almost be more like the Y two
Speaker 1: K problems. See this is a crossover episode between the
Speaker 1: Y companies have terrible software and the U. S Treasury. No,
Speaker 1: this is exactly what I've wondered whether rather whether we're
Speaker 1: thinking about it the risks is sort of the wrong dimension,
Speaker 1: whether it's actually kind of like creates all just sort
Speaker 1: of technical things like here's the one instrument that no
Speaker 1: one ever thinks about missing a payment on, etcetera. Right,
Speaker 1: it's like, uh, you know, I don't I don't know
Speaker 1: what the analogy would be, but I'm glad you brought
Speaker 1: this up because it seems like this could be the
Speaker 1: one thing. It's like, did they even like code the
Speaker 1: possibility that some of these instruments wouldn't get paid and
Speaker 1: what kind of like I mean it's kind of specultive, right, Like,
Speaker 1: it's hard to answer, but I'm glad you brought this up. Yeah,
Speaker 1: I mean I think the team over Hindsight Capital would say, well,
Speaker 1: I sure hope they'd this because you know, you've known
Speaker 1: it's a possibility. Yeah, when are we gonna get this?
Speaker 1: Every single trade their way ahead of things. Um, but yeah,
Speaker 1: I mean we've known this is at least the hypothetical
Speaker 1: possibility since at least, so you would hope right that
Speaker 1: that there have been some efforts to make sure that
Speaker 1: settlement systems can handle this sort of thing. But just
Speaker 1: because you would hope that doesn't and you can actually
Speaker 1: say like, oh, yeah, that's that's how it works. I
Speaker 1: know at some level there would be able to be
Speaker 1: settlement of treasury securities and defaulted. I mean, you can
Speaker 1: do stuff over the phone, you can do stuff with
Speaker 1: manual settlement procedures, but there's just no way that the
Speaker 1: markets canna be able to handle super high volumes if
Speaker 1: everyone's normal trading systems are just not working correctly because of,
Speaker 1: for instance, a maturity date that's prior to a settlement date, right, Like,
Speaker 1: it's just I think there would probably be some disruptions there.
Speaker 1: So you know that adds a liquidity dimension, and you know,
Speaker 1: liquidity being withdrawn possibly due to due to issues on
Speaker 1: the in the software, on top of the absolute risk
Speaker 1: premiums that people are willing to to bear. And you
Speaker 1: know this all applies equally to repo to you know, um,
Speaker 1: with repos. Instead of thinking like, oh, I want to
Speaker 1: buy your sell bond, it's like, oh, if I want
Speaker 1: to use this bond as collateral, can my system accept
Speaker 1: to this collateral if it's got a date that's later
Speaker 1: than you know, same same principles basically. So yeah, I
Speaker 1: mean I don't know the answer to any of this,
Speaker 1: to be clear, Like I used to work relatively close
Speaker 1: to bank settlement systems back at my prior role, but
Speaker 1: I haven't been near a bank settlement systems in almost
Speaker 1: a decade now, So you know, I I don't know, um,
Speaker 1: and I'm not sure anyone anywhere knows with great certainty
Speaker 1: what the aggregate trading community, whether it's fast money, real money,
Speaker 1: you know, what they can handle in this respect. But um, yeah,
Speaker 1: I don't know. So I want to talk about another
Speaker 1: you know, go back to this idea or talk about
Speaker 1: this idea of you hear payment prioritization, and of course,
Speaker 1: as you mentioned, Treasury hasn't assisted. Maybe they're bluffing that.
Speaker 1: It's technically they don't have the capability to say shut
Speaker 1: off one kind of payments easily while say like making
Speaker 1: sure that we continue to pay a debt. But setting
Speaker 1: us technical questions of whether they can do that. What
Speaker 1: about like the political questions of who gets to decide
Speaker 1: what shuts down? Because if you're Biden and it's like, okay,
Speaker 1: like we're not gonna pay the military, and look, the
Speaker 1: Republicans are preventing the military are brave men and women
Speaker 1: from getting paid. Look, and then the Republicans might say, well,
Speaker 1: you didn't have to shut down military payment, etcetera. You
Speaker 1: could have like done something less impactful, etcetera. But who
Speaker 1: gets to decide even a prioritization what doesn't doesn't get paid? Yeah,
Speaker 1: I think totally there are deep political questions about every
Speaker 1: facet of this whole problem. And I think it does
Speaker 1: illustrate so well how debt is a fundamentally political thing.
Speaker 1: I mean, we have our constitution because the first crack
Speaker 1: post revolution at at creating a structure for governance in
Speaker 1: the US didn't handle debt well, like, that's literally why
Speaker 1: we have a constitution, the constitution we have today. Obviously
Speaker 1: there's more stuff in the Constitution than just management of debt,
Speaker 1: but there is a general problem here where you are
Speaker 1: taking what was the purview of Congress and elected representatives
Speaker 1: in assigning payments to various stakeholders that the Treasury faces
Speaker 1: on a on a settlement basis, and you're you're taking
Speaker 1: that away and you're handing it to Treasury with no
Speaker 1: explicit decision to do so. If you're going to prioritize
Speaker 1: without legislation, and there will be no legislation on this,
Speaker 1: you know, then Treasury unelective bureaucrats at Treasury are just
Speaker 1: being told to make the best of it that they
Speaker 1: can and have fun figuring it out. That is not
Speaker 1: how a government's supposed to be run, right, I mean,
Speaker 1: that's not how a democracy is supposed to function. If
Speaker 1: Congress had wanted to delegate prioritization to Treasury and said
Speaker 1: that explicitly, that would be a fine whatever, that their purview,
Speaker 1: But that's not what's going on here. It's Congress saying, well,
Speaker 1: we're not going to do anything, so just do the
Speaker 1: best you can and throwing it back to Treasury. And
Speaker 1: when you get that outcome, I mean, that's not going
Speaker 1: to be good for anybody, regardless of who the winners
Speaker 1: and losers Treasury picks are, if they even have the
Speaker 1: ability to make those picks. It's it's it's it's a
Speaker 1: pretty deep irony that that a representative democratic system is
Speaker 1: doing this to itself. And again, I just I want
Speaker 1: to emphasize that this is Congress doing it to itself.
Speaker 1: This is not this is this is not inherent thing
Speaker 1: around that national debt management. This is a series of
Speaker 1: bad decisions that have been made by elected representatives over
Speaker 1: the past thirty or forty years that have gotten us
Speaker 1: to this point. And it's entirely a self inflicted situation.
Speaker 1: I think this is such an important point to make,
Speaker 1: this idea that debt is ultimately a social construct and
Speaker 1: inherently political in many ways. You know, it tells a
Speaker 1: story of who owes who what and why, and so
Speaker 1: it's immediately caught up in you know, the potential for
Speaker 1: different narratives. You mentioned how self defeating a lot of
Speaker 1: this tends to be in the US, and it does
Speaker 1: seem to put it mildly that defaulting on US debt
Speaker 1: would be bad. So what would happen if, you know,
Speaker 1: the executive branch just just decided to ignore Congress on this,
Speaker 1: Like what if people just go off and you know,
Speaker 1: the president goes off and does his own So earlier
Speaker 1: we were talking about, I mentioned how fun it would
Speaker 1: be if we had a general default and what that
Speaker 1: would mean for the treasure market as for the treasury
Speaker 1: market functioning fund, same thing for constitutional fund in this
Speaker 1: instance that you just described. Um So, just as a
Speaker 1: bit of background, if you read section four the fourteenth Amendment,
Speaker 1: one of the key reconstruction amendments after the Civil War,
Speaker 1: there's a clause that says the validity of the public
Speaker 1: dat of the United States, authorized by law, including debts
Speaker 1: incurred for payment of pensions and bounties for services and
Speaker 1: suppressing insurrection and rebellion, shall not be questioned. So this
Speaker 1: is just basically saying, like there's a general constitutional principle
Speaker 1: that if the United States government owes someone something, you
Speaker 1: can't get in the way of that right like that,
Speaker 1: that's the plain text reading of that. How far do
Speaker 1: those powers go? It's an it's an interesting question. No,
Speaker 1: one's ever really litigated it. This this this clause section
Speaker 1: four was mentioned in a in litigation around a new
Speaker 1: Deal case, but it wasn't it wasn't really directly established
Speaker 1: to be read in a maximalist or minimalist way. Other
Speaker 1: parts of the fourteenth Amendment have been litigated to the
Speaker 1: end of time. I mean, it is one of the
Speaker 1: most litigated parts of the entire Constitution that the Spring
Speaker 1: Court heres cases on. But this particular section has very
Speaker 1: little litigation associated with it, so we don't really know
Speaker 1: what courts would do. But if you read that that
Speaker 1: that text, just as you know, sort of a plain text,
Speaker 1: then it seems to create a constitutional obligation to pay
Speaker 1: the public debt of the United States. And it's one
Speaker 1: thing to say, well, you know, we can't pay the
Speaker 1: public debt because we've run out of dollars. But we
Speaker 1: know you and I, Joe and Tracy and hopefully odd
Speaker 1: lots of listeners at this point know that to treasury
Speaker 1: creates dollars. In the Federal Reserve creates dollars, and there's
Speaker 1: no there's no lack of those dollars there there you
Speaker 1: can't run out of them. So that's not that's not
Speaker 1: a restraint. What what then, is preventing the federal government,
Speaker 1: or specifically the executive branch and the Treasury, from going
Speaker 1: out and doing what the Constitution tells it to do
Speaker 1: by preventing people from questioning the debt and just saying,
Speaker 1: restraints on issuance of debt to make good on payments
Speaker 1: owed by the United States to third parties are I'm constitutional.
Speaker 1: The dead ceiling is I'm constitutional, and we're going to
Speaker 1: keep issuing debt until to to make payments until someone
Speaker 1: tells us to stop. That path is one that is
Speaker 1: hard to see from a political a political group that
Speaker 1: has been as risk averse as the Biden administration has been.
Speaker 1: But I do think you can make a very good
Speaker 1: case that in an emergency, a situation where there's a
Speaker 1: general default, where you know markets are crashing, where you
Speaker 1: know there's there's massive economic disruption, that this is a
Speaker 1: good choice to be made, that that that the debt
Speaker 1: ceiling is totally self defeating. It's a it's a it
Speaker 1: shouldn't exists in the first place. And by the way,
Speaker 1: there's a constitutional reading right here. Now. I'm not a
Speaker 1: constitutional scholar. I'm not a constitutional lawyer. I'm none of
Speaker 1: those things. Um, like jay Z said, you know, I
Speaker 1: passed the bar, but I know a little bit. I
Speaker 1: know enough to know that this could hypothetically work. But
Speaker 1: that's about it. So I don't think I would predict
Speaker 1: that the bid administration should or could go out and
Speaker 1: do this. But it is interesting to think about how
Speaker 1: these powers appear to be given to them by the Constitution,
Speaker 1: and that there could be a Supreme Court case settled
Speaker 1: based on whether the US has just issued bonds that
Speaker 1: are illegal under the Constitution. You know. Again fun, So, okay,
Speaker 1: we're not going to have like a coin conversation. But
Speaker 1: this does get to the other possibility, which is these
Speaker 1: technical workarounds that people believe exists in the law. So
Speaker 1: one possibility one of these workarounds could be invoked the
Speaker 1: fourteenth Amendment, And it seems pretty clear the history on
Speaker 1: that does not seem to be particularly ambiguous about why
Speaker 1: it's there, And it's kind of you know, I'm reading
Speaker 1: on Congress dot gov inspired by the desire to put
Speaker 1: beyond question the obligations for the government issued during the
Speaker 1: Civil War, and so like, I don't know, like it
Speaker 1: doesn't seem particularly ambiguous, but setting aside the fourteenth, talk
Speaker 1: to us about some of these other ideas in the
Speaker 1: law to avoid a default. I think the easiest one
Speaker 1: to understand and easy by the you know, if you
Speaker 1: know a little bit of bond math, The easiest one
Speaker 1: to understand is this idea of issuing very high coupon bonds.
Speaker 1: So when when we issue a bond, typically what happens
Speaker 1: is there's a bullet bond. Is the is the standard
Speaker 1: term for what people think of, as you know, for instance,
Speaker 1: a treasury bond, where you get a series of payments
Speaker 1: over time that are called coupons, that are regular small payments,
Speaker 1: and then you get a big payment at the end,
Speaker 1: which is called the principle. Right principle is you know,
Speaker 1: typically you you pay you you quote the price of
Speaker 1: a bond as the percentage of the principal payment that
Speaker 1: you will receive at the end. So for instance of
Speaker 1: bondus trading at that means you pay now and then
Speaker 1: you get the series of coupon payments associated with that
Speaker 1: bond and the principal payment at the end, which is
Speaker 1: a hundred. When Treasury auctions securities they are sensitive to
Speaker 1: they basically want to set the price of those securities
Speaker 1: just below one when they're first issued. Um, they don't
Speaker 1: want to issue bonds at a premium. And they also
Speaker 1: have a serious other constraints, like, for instance, the minimum
Speaker 1: increment of coupon. So what they'll do is they'll issue
Speaker 1: bonds with a coupon that sets the um the principal
Speaker 1: payment um or sorry, sets the auction price just below
Speaker 1: a hundred when they when they issue. So, for instance,
Speaker 1: they're not going to go out and issue a fifteen
Speaker 1: coupon coupon bond when the prevailing yield on treasure securities
Speaker 1: is like five percent, right like like like, they're never
Speaker 1: going to do that. But that's just like an internal
Speaker 1: norm that's not like written in law anywhere. They don't
Speaker 1: have a legal obligation to do it that way. If
Speaker 1: they wanted to, they could go out and issue a
Speaker 1: bond that matures with a principal value of a hundred
Speaker 1: and pays coupon payments of a hundred, you know, hundred
Speaker 1: per year for the next thirty years. Say so let's say,
Speaker 1: for instance, they did this, they said, well, we're gonna
Speaker 1: issue what's called a super high coupon bond, and again
Speaker 1: this is nonsense territory from a from a pure finance perspective.
Speaker 1: But let's say they go out and and that bond
Speaker 1: that matures thirty years from now at a phase five,
Speaker 1: it will pay a hundred and coupons every year as
Speaker 1: opposed to the you know, four percent coupon on the
Speaker 1: most recently issue third or bond something like that. So
Speaker 1: if you do the bond math on that, if you
Speaker 1: if you discount all those cash flows back to present
Speaker 1: value at the current prevailing interest rate, what you've got
Speaker 1: is an eighteen hundred dollar You receive eighteen hundred dollars
Speaker 1: today for the bond maturing at a hundred in the future.
Speaker 1: And the reason you get that is because it's got
Speaker 1: that long string of payments associated with it, whether the
Speaker 1: same size as the as the principal payment. You've basically
Speaker 1: issued a zero coupon strip, all in one instrument for
Speaker 1: the next thirty years. And you've done that, you're the
Speaker 1: impact to the debt ceiling is a hundred, but you
Speaker 1: now have another seventeen hundred in your in your pocket
Speaker 1: because of those coupon payments. Those coupon payments aren't covered
Speaker 1: by the debt sailing their coupon payments not principal payments.
Speaker 1: Right that when when Treasury counts debt, they're not counting
Speaker 1: the coup the interest costs, they're counting the principal value.
Speaker 1: So hundred dollars is I mean, like like it's a
Speaker 1: technicality where you can say, well, the coupon isn't principal,
Speaker 1: but it's still cash in my pocket now delivered at
Speaker 1: a later date that doesn't count against the dead ceiling.
Speaker 1: So you know, that would be another technical workaround they
Speaker 1: could use. Again, this one is on much less dicey
Speaker 1: legal footing. There are lots of reasons why Treasury maybe
Speaker 1: want to say we don't want to do this, Um,
Speaker 1: we don't have any interest in this, we're not able
Speaker 1: to do this whatever. There There could be lots of
Speaker 1: reasons for that, but but legally it's it's not quite
Speaker 1: as dicey as saying to Congress in the Supreme Court, well,
Speaker 1: we're just going to keep issuing Debton. You know, take
Speaker 1: your best shot at stopping us. I'm trying to think
Speaker 1: what would be a harder sell to the public is that,
Speaker 1: you know, issuing a high coupon bond that like gets
Speaker 1: you immediate proceeds that are a lot more than the
Speaker 1: actual issue once amount, or is it a large novelty coin. Well,
Speaker 1: I mean, so I was gonna you know, the novelty coin.
Speaker 1: I'm sure you know, well, we know the headlines are
Speaker 1: gonna be on that. But you know, at the same time,
Speaker 1: I'm I'm imagining Biden is borrowing at a hundred percent
Speaker 1: interest rates from China to like the payday loan to
Speaker 1: like you know, like the the The headlines could go
Speaker 1: in either direction, for sure, Yeah, I mean, but then
Speaker 1: you have to explain like like what how it's even
Speaker 1: possible to borrow a hundred percent interest rates or or
Speaker 1: like what is even happening there? I mean, I do
Speaker 1: think both the coin for for all it's downsides tracing.
Speaker 1: I know how much you love the coin, but you
Speaker 1: know the benefit of both the high coupon bond plan
Speaker 1: and the coin plan is that they're weird incantations, you know,
Speaker 1: run by technocrats. They're not They're not like a tangible
Speaker 1: thing where it's like the U. S Constitution and like
Speaker 1: this sort of feeling that the world is going straight.
Speaker 1: It's like, oh, well they said the right words and
Speaker 1: everything is fixed now. So who cares is is how
Speaker 1: people tend to think about this stuff. I think. Whereas
Speaker 1: when you're talking about the Supreme Court and the Constitution
Speaker 1: and Article um section four of the fourteenth Amendment and
Speaker 1: the history and that, people get very arpen arms all
Speaker 1: the Constitution, you know whatever. Whereas if it's just like, oh,
Speaker 1: well we just said the right words magically to the
Speaker 1: bond market and now everything's fine, I think you get
Speaker 1: a very different you know, feeling from that politically. But
Speaker 1: that's speculation on that part. This is something that's important,
Speaker 1: which is that okay, let's say the administration to say,
Speaker 1: you know what, the fourteenth Amendment says, the dead sailing
Speaker 1: is invalid. We're just going to ignore it and continue
Speaker 1: fiscal operations as normal. And then, as you pointed out,
Speaker 1: there might be some ambiguity about whether the bonds issued
Speaker 1: after that moment are legal, and maybe there would be
Speaker 1: get to the Supreme Court. We don't really know what
Speaker 1: they were going to say. But to some extent, this
Speaker 1: even applies to any other solution as well, including the
Speaker 1: high coupon bonds, including the coin, which is that like
Speaker 1: someone could sue over the coin, Like no one's gonna
Speaker 1: stop it. And if like five out of the nine
Speaker 1: Supreme Court justices says you can't issue a hundred year bonds,
Speaker 1: like that's clearly in violation to the spirit of the
Speaker 1: dead Sailing law. You know, you're still issuing debt at
Speaker 1: a time when we're not supposed to issue any more
Speaker 1: debt Like the uncertain the exist in almost any of
Speaker 1: these scenarios for sure. And you know we set it before,
Speaker 1: and I'll say it again, this is all a political question,
Speaker 1: a social question, right like that, Like political power means
Speaker 1: telling people to do something that they don't want to do.
Speaker 1: That is what political power is, right, And whether it's
Speaker 1: the Biden administration forcing issuance of new debt, whether it's
Speaker 1: the Supreme Court stepping into either validate that or or
Speaker 1: or invalidate that. You know, that's the fourteenth a medi scenario,
Speaker 1: or whether it's the Biden administrations saying, Okay, we're not
Speaker 1: going to make any payments regardless of who doesn't get paid,
Speaker 1: or it's prioritization where some people get paid, for instance,
Speaker 1: bond holders maybe get paid, but you know, retirees don't
Speaker 1: like whatever approach you take to this. At some point
Speaker 1: someone is being told you don't get what you want
Speaker 1: because you can't stop me, you know, under our system,
Speaker 1: right like like you physically can't stop me, or you know,
Speaker 1: enough of other political bodies have sided with me so
Speaker 1: that you can't get done what's what you want to
Speaker 1: get done? And you know this is a like at
Speaker 1: the end of the day, the dead ceiling has lots
Speaker 1: of interesting financial and economic and analytical things to explore,
Speaker 1: but it's always going to come back to being a
Speaker 1: political problem. Was created by politicians. It's it's being exacerbated
Speaker 1: by politicians, and it will be solved through political means
Speaker 1: and nothing else. And you know, I just I'll always
Speaker 1: come back to that. I I really in that. From
Speaker 1: that perspective, I cannot emphasize enough that that Congress has
Speaker 1: created this problem for itself, and if there was justice,
Speaker 1: then Congress would lose power in some sense over this,
Speaker 1: whether it's the death ceiling is invalidated by the Supreme
Speaker 1: Quarter or by the by administration or whatever, or you know,
Speaker 1: some other solution. Unfortunately, like the world doesn't work based
Speaker 1: on karmic justice, So I don't think we can hope
Speaker 1: that oh well, the you know, Congress gets its come
Speaker 1: up in but maybe they will. I mean, we'll see.
Speaker 1: I mean, it's gonna be an interesting few months here,
Speaker 1: to say the least. So the overarching theme of this
Speaker 1: conversation is just mass uncertainty, lots of hypothetical shooting out
Speaker 1: in every different direction, and no one really knows what's
Speaker 1: going to happen when we finally hit that X date,
Speaker 1: the drop dead date. But there is something sort of
Speaker 1: more immediate, a potential more immediate impact. And I think
Speaker 1: we touched on this when we were talking about t
Speaker 1: g A balances, this idea of you know, the Treasury
Speaker 1: is checking account at the Fed. It does have an
Speaker 1: impact on liquidity. So what's going on with the t
Speaker 1: g A. You know, if there's more money in there,
Speaker 1: if there's less money in there, it can mean different
Speaker 1: levels of liquidity for the broader economic system, for companies
Speaker 1: that might be due payments from the government. Talk to
Speaker 1: us a little bit about the immediate impact of all
Speaker 1: this discussion over the debt ceiling on market liquidity and
Speaker 1: money harry policy as well. Yeah, so this is kind
Speaker 1: of a perverse thing about how the mechanics of of
Speaker 1: the t g A being inflated with that sort of
Speaker 1: cushion we discussed earlier. It's perverse how this works, because
Speaker 1: when the Treasury is building up that cushion, they are
Speaker 1: withdrawing aggurate liquidity from the private sector. Treasury is withdrawing
Speaker 1: liquidity from the private sector because that increase in t
Speaker 1: g A balances is being funded by some combination of
Speaker 1: higher debt and you know, higher tax as relative depending
Speaker 1: it's debt, right, the Treasury is issuing more bills and
Speaker 1: more notes and bonds than they technically need for the
Speaker 1: specific period in time. That means cash balances are being
Speaker 1: dragged out of the private sector and to the Treasury's
Speaker 1: cash balance. At the FED, that's a federal reserve liability,
Speaker 1: just like a FED fund is, but in the but
Speaker 1: the liability that the FED holds in the t g A,
Speaker 1: the only asset, the only person who can hold that
Speaker 1: as an asset is Treasury, whereas Federal reserve FED funds
Speaker 1: are an asset that can be held by the banking
Speaker 1: sector and used to match against deposits that are an
Speaker 1: asset of the rest of the private sector. So basically
Speaker 1: it's like reverse quite right, when this TJ is being
Speaker 1: built up, it's it's it's pulling liquidity out of the
Speaker 1: private sector and storing it in the t g A.
Speaker 1: Then the t as the t J is released, it
Speaker 1: does the opposite, right, so it unleashes private sector liquidity
Speaker 1: because that liability of the Federal of the Federal Reserve
Speaker 1: to the Treasury is being spent down. The payments are
Speaker 1: wounding up as assets of the rest of the private
Speaker 1: sector or the rest of the world. Basically, everybody but
Speaker 1: the federal government funded by Federal Reserve FED funds liabilities
Speaker 1: of the of the FED. So it's basically a countercyclical thing,
Speaker 1: right Like it's it's as as times are good and
Speaker 1: we're you know, go along and t g gets built
Speaker 1: up and then we've got worried about that ceiling. But
Speaker 1: at the same time, a bunch of liquidity as being unleashed. Now,
Speaker 1: the sizes here are not necessarily huge. It sort of
Speaker 1: depends on the specific instance. But the size of the
Speaker 1: t g A has gotten pretty big relative to the
Speaker 1: rest of the Fed's balance sheet as a matter of course.
Speaker 1: So prior to the global financial crisis two thousand seven,
Speaker 1: two eight kind of range, the TJA was less than
Speaker 1: one percent of the FEDS balance sheet. Basically payments in
Speaker 1: payments out almost precisely matched each other day to day.
Speaker 1: From two eight fifteen, it built up a little bit
Speaker 1: because just the scope of federal government spending went up.
Speaker 1: There was a lot more issuance of debt with post
Speaker 1: crisis deficits that were that slowly sort of declined from
Speaker 1: the peaks in two thousand nine. But then when we
Speaker 1: get to and treasure says, okay, well we want to
Speaker 1: start building up this this cash balance from average six
Speaker 1: percent of the Fed's balance sheet UM so it was
Speaker 1: below one percent before the goal financial crisis immediately after
Speaker 1: is about two after that. After six since q it's
Speaker 1: been eleven percent of the FEDS balance sheet. That's a
Speaker 1: huge percentage of the FEDS balance sheet, and it swings
Speaker 1: around quite a lot, unlike, for instance, the q AST
Speaker 1: purchase portfolio. So basically you've got this complicating factor that
Speaker 1: has nothing to do with the FEDS monetary policy UM
Speaker 1: setting that the FEDS, the FED is not changing policy
Speaker 1: based on treasury cash management, and yet it's got this
Speaker 1: this sort of impact on aggregate private sector liquidity, both
Speaker 1: positive and negative depending on what's going on with the
Speaker 1: t g A UH, do you have to account for
Speaker 1: so you know, as we see the t g A
Speaker 1: spend down over the next few months, it's already underway. Um,
Speaker 1: that will have an impact on aggregate private sector liquidity.
Speaker 1: That will be kind of sort of counterintuitive. I guess
Speaker 1: you could say. Right now, there's about five hundred and
Speaker 1: sixty billion in the Treasure General account. That's down from
Speaker 1: a peak of almost a trillion in May of last year.
Speaker 1: The recent peak, it's it's it's it's sort of trended
Speaker 1: lower over the past seven months or so, and that
Speaker 1: will continue to trend lower as we go from five
Speaker 1: sixty down to zero presumably or near zero at the
Speaker 1: X date. All right, I want to ask one more
Speaker 1: markets related question, and I think there's this fantasy that
Speaker 1: people have, which is that the stock market becomes the
Speaker 1: sort of forcing mechanism. The example that everyone would site
Speaker 1: is the tarp out. It failed in two thousand and eight,
Speaker 1: and the stock market crashed some more, and then they
Speaker 1: passed it a couple of days later. It doesn't seem
Speaker 1: like that dynamic really holds with the dead ceiling, because
Speaker 1: even though there's this potential for catastrophe, on certainty, the
Speaker 1: view amongst stocks investors seems to be they always get
Speaker 1: it done in the end. Why would I sell my stock, etcetera.
Speaker 1: Like can you talk a little bit about, like, as
Speaker 1: we get closer, is there any sort of like history
Speaker 1: or like the sort of interplay between market volatility and
Speaker 1: pressure to just like all right, let's get it past.
Speaker 1: There is no doubt that there is a feedback loop
Speaker 1: between asset markets and how politicians think in this country.
Speaker 1: I mean, using a more recent example from then the
Speaker 1: top vote, which I think is a good, good one,
Speaker 1: you could look to what happened in the spring of right,
Speaker 1: we saw a degree of fiscal stimulus and a degree
Speaker 1: of support for households that completely unprecedented in American history
Speaker 1: and completely like if you had dreamed up the scenario
Speaker 1: where that happens, even if you had you know, no
Speaker 1: one about COVID coming, and you had said, okay, well,
Speaker 1: then you're going to see this public sector response to that,
Speaker 1: I don't think anyone would have believed you. They just said, no,
Speaker 1: there's no way that the Republican Congress will will do that.
Speaker 1: There's no way that there are no Republicans and Congress
Speaker 1: will okay that, There's no way that I'll get through
Speaker 1: filibusters and all that, and it absolutely did, and it
Speaker 1: did so immediately because asset markets were in free fault
Speaker 1: right there. There is a lot more feedback to political
Speaker 1: economy in this country and to political out comes in
Speaker 1: this country from the stock market then from the unplaying right.
Speaker 1: That is just how things work. I'm not defending that,
Speaker 1: it's just the reality. So I do think that if
Speaker 1: we if we see stock markets start to false you know, measurably,
Speaker 1: you know, like like big volatility, big downside in the
Speaker 1: months or weeks leading up to the sort of X
Speaker 1: state as it sort of becomes more clear, then you
Speaker 1: will definitely seem a lot of pressure on politicians to
Speaker 1: to just just raise the dang thing, you know, have
Speaker 1: your fights about something else. Whether that comes from people
Speaker 1: within the respective ideological goals of each party, whether that
Speaker 1: comes from the public as a whole, it's unclear, but
Speaker 1: either way there will be significant pressure. If, however, stock
Speaker 1: markets say, well, you know, like they'll figure it out
Speaker 1: and event you know, maybe there there'll be a default,
Speaker 1: but like they'll pay those back eventually, and people be
Speaker 1: commented and like area with plenty of people that are
Speaker 1: willing to pick up an extra twenty five basis points
Speaker 1: in a Treasury bill to hold it for a few
Speaker 1: months while they figure out this, this this out and
Speaker 1: it'll be fine, and so we can just sort of
Speaker 1: look past that. If if that happens, that's a recipe
Speaker 1: for a much more protracted fight and a much longer
Speaker 1: time past the X date with you know, uncertainty going on. Now.
Speaker 1: My view would be that if you if you get
Speaker 1: to the X date, even if you have prioritization, barring
Speaker 1: using one of the technical workarounds we discussed, so either
Speaker 1: the coin or using high coupon bonds or um just
Speaker 1: saying well, this violates the fourteenth Amendment, so we're going
Speaker 1: to ignore the death ceiling if you if you you know,
Speaker 1: don't have those and you have either prioritization, which Treasury
Speaker 1: said isn't possible but could be possible and you're working
Speaker 1: through prioritization, or if you're just doing a general default,
Speaker 1: We're we're not paying any payments until the dead ceilings race,
Speaker 1: because that's that's what the law tells us to do.
Speaker 1: If if I'm the Treasury, okay, either way in either
Speaker 1: a prior to a severe prioritization scenario or a general default,
Speaker 1: you're going to have large economic impacts from that, right,
Speaker 1: Like like that, the volume of outgoing payments that are
Speaker 1: not going to show up in the bank accounts of
Speaker 1: people that want to spend them, whether those are businesses
Speaker 1: whether their individuals, is going to be really big. Social
Speaker 1: Security is a really good example. Like if you start
Speaker 1: paying Social Security, the entire economy grants to a halt
Speaker 1: about a month. There's just not it's it's just such
Speaker 1: a huge cash flow for such a large percentagers of
Speaker 1: population that you can't So eventually there will be a
Speaker 1: feedback to asset markets. This will not last forever where
Speaker 1: it's just kind of the new normal that the US
Speaker 1: is permanently you know, has the destiny in place, and
Speaker 1: you know, only making some outgoing payments. Eventually the economy
Speaker 1: starts to collapse, the stock market starts to collapse, and
Speaker 1: you you know, you see and another interesting thing, just
Speaker 1: to work it back to the Fed. An interesting thing
Speaker 1: to think about it is if the economy is collapsing
Speaker 1: because all these payments aren't going out and the stock
Speaker 1: market is in free fault us, the FED step in
Speaker 1: to say, okay, well we're going to cut rates now.
Speaker 1: Because the economies and free fall because of what's going
Speaker 1: on with the dead sailing or do they say not
Speaker 1: our problem? I don't know. I don't have a good
Speaker 1: answer for that. I don't I don't think a good
Speaker 1: answer exists, but it's something interesting to think about. It
Speaker 1: feels like this is one of those topics where there
Speaker 1: just aren't a lot of good answers. But George did
Speaker 1: a good job. Yeah, you did a great job. There's
Speaker 1: a lot of uncertainty and hypotheticals as we've been talking about.
Speaker 1: It's not an easy thing to sort of lay out
Speaker 1: all the different options and what might happen depending on
Speaker 1: what's pursued. But George, it was great having you on.
Speaker 1: You did a great job. Thank you so much. Yeah,
Speaker 1: thanks for having me on. I mean I can stick
Speaker 1: around for another three hours and we can get all
Speaker 1: the different hypotheticals if you want. All right, now our
Speaker 1: to the coin conversation. Okay, I'm thanks man, let's go.
Speaker 1: Thanks for having me on, George. Thanks George. Joe. There's
Speaker 1: a lot to unpack from that conversation. I agree, But
Speaker 1: George did like a great job, Like you know, there
Speaker 1: is a lot of uncertainty. I guess because it's something
Speaker 1: that had been lodged in my mind. But like, I'm
Speaker 1: glad he brought up that question of like the software
Speaker 1: element of defaulted debt, because it's just something like I
Speaker 1: want like people like you know, like we don't talk
Speaker 1: about debt in those terms. It seems totally like a
Speaker 1: Y two K thing, as you mentioned, where people just
Speaker 1: would not expect US treasuries to default. And anyway, why
Speaker 1: would you prepare for such a scenario, because if that
Speaker 1: were to happen, then it would be the collapse of
Speaker 1: the financial system as we know it. But yet here
Speaker 1: we are, you know, after two thousand eleven, after having
Speaker 1: a very similar conversation. The other thing that's stuck out
Speaker 1: in my mind was George's point about, you know, ultimately
Speaker 1: this is a political process and it plays out in debt.
Speaker 1: But the reason it plays out in the debt market
Speaker 1: is because debt is inherently, I think, so tied up
Speaker 1: with questions of morality and justice, and it's so easy
Speaker 1: to build a political narrative on top of something that
Speaker 1: is ultimately about who owes what to who and why? Absolutely,
Speaker 1: And you know, I think that's why it's really notable
Speaker 1: that this was written into the constitution, and we run
Speaker 1: into the constitution after the Civil War. And what we
Speaker 1: did have that coin conversation was with Roman Grande. He
Speaker 1: talked about this as well, which is that like this
Speaker 1: fear that in the pursuit of the Civil War that
Speaker 1: southern representative representatives from the formerly confederate state would try
Speaker 1: to induce a default because it's like, oh, we don't
Speaker 1: want to pay the debts of the northern government that
Speaker 1: fought a war against does and so they did, like
Speaker 1: they this is like, you know, it gets to like
Speaker 1: deep constitutional questions and it continues to play out over
Speaker 1: and over again in different forms, the political weaponization of debt.
Speaker 1: It seems to be happening more often because I think
Speaker 1: people have realized that it is an effective pressure point.
Speaker 1: As George laid out well on that happy note. Shall
Speaker 1: we leave it there, Let's leave it there. Okay. This
Speaker 1: has been another episode of the Odd Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe Why Wasn't Though. You can follow
Speaker 1: me on Twitter at the Stalwart. George doesn't really tweet anymore,
Speaker 1: but maybe he'll come back one day, so I'll plug
Speaker 1: it anyway. His handle is at Perks. Follow our producer
Speaker 1: Carmen Rodriguez at Carmen Armand and Dash Bennett at dashbot.
Speaker 1: And check out all of our podcasts at Bloomberg. Under
Speaker 1: the handle at podcasts and some more odd Lots content.
Speaker 1: Go to Bloomberg dot com slash odd Lots when we
Speaker 1: push the transcripts. We have a blog, a weekly newsletter
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Speaker 1: for listening. See to