David Gracey

David Gracey

David Gracey | Head of Foreign Exchange and Fixed Income Trading

Currency Comment: When the money runs out

  • Every few years the U.S runs out of money. 

    You may ask – what, how, why…..what?

    This mechanism was introduced in the early 1900’s, (about when I started my career), to streamline the process of issuing debt. Where previously congress had to approve every bond issue, which of course was tedious, they now allowed Treasury to do their own thing as long as total debt remained under a given threshold. This makes perfect sense.

    I don’t have a number for the very first “debt ceiling”, but around the time of the second world war it was around 65 Billion USD.

    It has subsequently been raised around 80 times.

    So, like a college student who has reached their parents imposed credit card limit, they have to go to back to …er…….themselves, and ask if they can borrow more money.

    Congress sits and debates, and the Republicans and the Democrats jawbone endlessly, haggling, and dealing, and threatening to shut down the Government unless some or other concessions are made, until they all agree and pat (or stab) each other on the back, and raise the limit of how much more money treasury can borrow, until the next time.

    The US now has an accumulated debt of a staggering 28,5 trillion USD.

    The U.S economy has changed significantly since the second world war. They run a trillion USD annual trade deficit, and an even bigger current account deficit and they don’t really make anything except crappy cars, crappy burgers, crappy architecture and crappy politicians. Although in that they do not enjoy a monopoly.

    They do design great computers though. And phones, and the internet …..anyway I digress.

    There are 3 issues to be conscious of here.

    Little wonder then that markets are a little skittish as the expected deadline date (not exact) approaches on 18 October.

    Along with problems in China, the UK, and other places, markets are not happy.

    Therefore EM remains  under pressure, dragging the ZAR to weaker levels (even though we continue to see good export flow)

    The great irony is the strengthening USD….intuitively it doesn’t make sense, however, intuitively, should the USD be the world’s reserve currency?

    Remember to check your own credit card balance. It’s never nice to have to ask for increased limits. 

    A) because the USD is the world’s reserve currency (until it isn’t), they are allowed to run up these deficits simply because they can fund it through US treasury bond sales, and no one really cares (until they do)

    B) deficits of this size are easy to fund when interest rates are low, however, they become problematic as interest rates rise, or you run out of funders……The Chinese hold a sizeable portion of this debt.

    C) Trump actually shut the Government down during one of these periods of DC negotiation, because he wanted money for the border wall (which the Mexicans were ….ag never mind).  These negotiations can get quite testy, and Dems and Republican relations are not that great. So there is always a chance that congress doesn’t reach consensus, in which case Government shuts down, which could have serious implications for the global economy.