LEON TROTSKY, MAY I INTRODUCE MILTON FRIEDMAN?

Regular readers are aware of where the real debt ceiling is.

Last week, Nick Beams at the World Socialist Web Site called attention to it.

Financial markets appear to have been enjoying a period of relative calm in the past year since they were shaken by the failure of three significant US banks in March 2023, requiring rescue operations by financial authorities.

But there are signs of turmoil building up beneath the surface. They centre on continuing possible liquidity problems in the $26 trillion US Treasury market, the basis of the global financial system, signs of currency divergences and concerns over the growing role of private credit in the financial system.

Last week a tremor went through the Treasury market when there was what was characterised as a “shaky auction” for $44 billion worth of seven-year US Treasury notes. The shortage of buyers mean that the big banks, which are crucial to the operation of their market as primary dealers, had to make up for the shortfall and purchase 17 percent of the debt, somewhat higher than the norm.

This followed an auction the previous day when there was subdued demand in an auction of two- and five-year debt.

The lack of demand, sending the price of debt lower, meant that the interest rate on the 10-year bond (the two move in the opposite direction), went to 4.63 percent, higher than it has been in some weeks.

The immediate cause is the realisation that the Federal Reserve is not going to make significant cuts in interest rates in the near future. At the start of this year, markets were pricing in as many as six rate cuts by the Fed in 2024. Now there are predictions there may not even be one.

We all know that, as we know the outcome: the money center banks who do the open market operations on behalf of the Fed had to add the unsold bonds to their balance sheets, thus crowding out those banks' ability to lend for such things as houses, locomotives, or hot pepper canneries.  Meanwhile China is going broke, slowly.

A fall in the value of the renminbi would impact on other countries, especially in Asia, which depend on the Chinese market, and could lead to stepped up action from the US, which has already accused China of dumping cheap products on the US and world markets. A devaluation would further lower the price of Chinese goods in the US and other markets.

But a one-off devaluation is a possibility because, as one Shanghai-based currency trader told the FT, there was “enormous downward pressure that has built up over the past few months.”

Another potential source of instability, already pointed out by the International Monetary Fund and other financial institutions, is the growth of private credit funding.

What's the big deal? Only this, dear reader: nowhere in that factually accurate column do you find any of the expected crowing about the final crisis of capitalism or the boilerplate closing paragraphs about the Vanguard of the Revolution.