24.9.17

THE CASE FOR A PROPER BALANCE SHEET.

It's likely, as James Kunstler has suggested, that Our President struck a deal with House and Senate Democratic leadership to raise the debt ceiling as a credible commitment to the financial markets.  (Such an action was necessary anyway, because the flood insurance trust fund was at its borrowing limit, and in order for the flood insurance trust fund to borrow more money, the Treasury has to borrow the money.)
The event is converging with the US government running out of money this fall without new authority to borrow more by congress voting to raise the US debt ceiling. Perhaps the emergency of Hurricane Harvey and its costly aftermath will bludgeon congress into quickly raising the debt ceiling. If that doesn’t happen, and the debt ceiling is not raised, the federal government might have to pretend that it can pay for emergency assistance to Texas and Louisiana. That pretense can only go so far before government contractors balk and maybe even walk.

Ordinarily, failure to raise the debt ceiling would lead to a government shut-down, including hurricane recovery operations, unless the president invoked some kind of emergency powers. That would be decisive action, but it could also be the beginning of something that looks like a full-out dictatorship. Powers assumed are often not surrendered when the original emergency is over. And what would the president use for money if a substantial enough number of congresspersons and senators are prompted by their distaste for Mr. Trump to drag out the process of financially re-liquefying the government? (And nevermind even passing a budget.)
But you don't have to rush out yet, dear reader, to stock the fallout shelter with fresh hard-tack, and make sure there are hollow-points for the pistols.
The message from the debt ceiling stalemate to the bond market would be that the US can no longer be relied on to pay its debts. Interest rates on US Treasury paper would have to go up as the long-lost concept of risk returned to the bond scene. People and institutions will not be induced to hold bonds unless the yield is recalibrated to the actual risk. Of course, in the mysterious world of bonds (i.e. securitized debt), the price of bonds goes down as interest rates rise. Meaning a lot of current holders of bonds would be hammered if they tried to sell. Rates rising would also spell big trouble for corporations and governments who have to make regular interest payments to bond-holders. A rate rise to as little as 3 percent on US Treasury bonds could spin the country into comprehensive bankruptcy.
Why not?

That's my case for a proper balance sheet.  The going concern value of the United States is an accounting abstraction, and yet, the country is a long way from bankruptcy.  "The Federal Reserve said Thursday Americans' net worth rose 1.8% to $96.2 trillion in the April-June quarter. Stock portfolios and mutual funds jumped $1.1 trillion. Home values climbed $600 billion."  That rising tide is not lifting all the boats.  "[R]oughly 75% of the $1.8 trillion increase in assets went to benefit just 10% of the population, who also account for roughly 76% of America's financial net worth."  Thus, a good chunk of the population is still in debt.

But the Treasury is a long way from not being able to service the borrowing.

On the other hand, the government of Barbuda, debt ceiling or no, does not have the money (or the borrowing capacity?) to make repairs to the island's houses and roads, which were seriously damaged by Hurricane Irma.  Immediately after the storm, surviving residents were moved to neighboring Antigua.
[Ambassador to the United States Robert] Sanders says the world must step up and help Barbuda.

“We are a small island community — the gross domestic product of Antigua is $1 billion a year,” he says. “We cannot afford to take on this responsibility by ourselves. Barbuda is not just a disaster, it’s a humanitarian crisis. We are hopeful that the international community will come to our aid, not because we’re begging for something we want, but because we’re begging for something that is needed.”

Right now, initial estimates suggest that Barbuda will need about $200 million to recover. Antigua and Barbuda will create a sustainable development plan for rebuilding Barbuda, Sanders says, adding that he hopes the global community will provide humanitarian recovery aid.

“We have declared a state of emergency in Barbuda because it is a complete disaster and uninhabitable,” he says. “We cannot cope with our own resources alone.”
Actor Robert DeNiro is leading a crowd-funding campaign, and it appears that the major hotels are on their own financing their rebuilding.

Yes, Thomas Friedman's old recommendations to short countries might have been flip, and yet, accurate estimates of going concern values for countries or not, that is what we sometimes see.

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