IS GRADUAL BECOMING "ALL AT ONCE?"

The real debt ceiling is not a number on an engrossed bill.  It is an event, specifically, when bond buyers buy Treasuries only at deep discounts.

Are we there yet?

Sustaining order requires securing investors for the tens of billions of dollars in debt which are sold every week.

This effort has gotten more challenging over the past two years, as the Federal Reserve has reduced its holdings of government bonds.  Finding replacement buyers hasn’t been too problematic, but there are increasing signs of strain.  The implied “term premium” that the Treasury pays to borrow has been increasing, contributing to higher yields.

Recent auctions of debt have occasionally disappointed. The appetite of investors for newly-issued government securities is gauged by several measures. The “bid-to-cover” ratio compares offers to buy with the amount on offer; a lower number indicates weaker demand. This metric has slipped in several recent cases.

In order to ensure that debt auctions are fully subscribed, the U.S. Treasury works with a series of primary dealers. These banks step in to purchase bonds when bids from private investors aren’t sufficient; that support has been drawn on more heavily in recent months.

Given the poor state of the American fiscal situation, auctions will likely remain large for the foreseeable future. The risk that markets will push back is rising. No amount of fast talk from politicians will hide the fact that we may be selling a lot of bull.

Are we there yet?

Several factors have contributed to the shifting landscape of Treasury buyers. The Federal Reserve, for example, is no longer a consistent buyer of bonds; instead, it is actively shrinking its balance sheet. To date, the Fed has sold off $2.3 trillion worth of assets, primarily Treasury securities. Meanwhile, foreign central banks have begun to back away from purchasing US Treasuries. Recent sanctions and the confiscation of foreign assets have heightened concerns about the safety of parking reserves in US dollars.

Moreover, what did I tell you, dear reader, about the laws of conservation in economics?  "Moreover, to the extent that tariffs reduce current account deficits, they reduce capital account surpluses pari passu."

It's unseemly to say "See, I told you so," and yet:

In addition, the ongoing tariff disputes have created chaos that has, in turn, reduced international capital flows. With diminished global trade, there are fewer trade surpluses, which means fewer dollars are available to be invested in US Treasuries. Compounding the issue, the recent struggle with extremely high inflation has caused investors to worry about the value of the dollar, which underpins the attractiveness of US Treasuries.

Solvency concerns are also mounting as the US continues to run persistent and protracted deficits of $2 trillion annually. This staggering amount of red ink is occurring during times of relative peace and economic prosperity, raising important questions about what might happen during a recession or war.

Indeed, and where is the traditional Keynesian conventional wisdom about balancing the budget over the business cycle?