FXstreet.com (Barcelona) - Marc Chandler, Global Head of
Currency Strategy at Brown Brothers Harriman notes that it is
widely recognised that the recent fiscal ´mini-deal´ neither put
the US on a sustainable fiscal path, nor lifted policy uncertainty.
Conversely however, minutes from the latest FOMC showed that
several members are anticipating the end of QE3 before the end of
the year, clouding the outlook.
In an attempt to avoid the partisanship of the heated debates,
Chandler has offered an overview of the outlook for US policy,
devoid of hyperbole.
He writes, "The federal government is already bumping against the
debt ceiling. This is the limit on borrowing that Congress has set,
though it has already approved the spending. The Treasury
Department has already indicated that it is resorting to unorthodox
measures that can last a few weeks."
Looking back he remembers that it was such a fight between a
Democrat President and Republican-controlled House of
Representatives that led to the closure of the government twice in
1995. Some Democrats are encouraging Obama to challenge the
constitutionality of the debt ceiling legislation.
Chandler feels that the gist of the argument is that the 14th
Amendment (to the Constitution) states that the "validity of the
public debt of the US, authorized by law...shall not be
questioned." The claim is that the debt ceiling raises doubts over
the sanctity of US financial obligations. It is, as one pundit put
it, like eating a breakfast at a restaurant and then balking when
the bill comes. Obama has indicated no intention of challenging the
validity of the debt ceiling.
He writes, "Beginning in the blogosphere seemingly as a joke, the
idea that the Treasury Department can take advantage in a loophole
to bypass the debt ceiling has captured the imagination of many.
The idea here is that the Treasury Dept is free to create platinum
coins of any denomination. It could "create" a $1 trillion platinum
coin and retire the same amount of existing debt."
However, he notes that despite the yards of commentary devoted to
this idea, it is a non-starter for numerous reasons. Suffice it is
to point to two here. First, if Obama does not want to challenge
the constitutionality of the debt ceiling, he is most unlikely to
embrace such a gimmick. Second, there is simply nowhere near enough
platinum. Reports suggest that only 16 tons of platinum have ever
been mined. Near current prices, $1 trillion would require nearly
18,000 tones of platinum.
Around the time that the debt ceiling will have to be address, the
US will face additional pressure to act and the resolution of the
fiscal cliff included delaying the depending cuts until the start
of March. The sequester called for $110 bln in spending cuts,
evenly divided between defence and non-defence sectors. Social
security and Medicaid spending were not included.
At the end of March, Chandler notes that the existing budget
appropriation authority expires. This is the authority that
Congress grants that allows the government to spend money on
anything but essential services. He notes that this is
Congress´ultimate power over the executive branch... it controls
the purse strings. He adds that separately, the debt ceiling, the
spending cuts and expiration of the appropriation authority could
see a fierce fight, but together, they may make the fiscal cliff
negotiations seem like a tea party.
Chandler continues to write, "It is ironic that the minutes from
the FOMC meeting at which it decided to more than double the size
of its outright asset purchases (to $85 bln a month from $40 bln)
and adopt macro-economic guidance that suggests interest rates will
not be raised in for more than two more years, some observers see
signs of an early end QE. Moreover, the new configuration of the
votes on the FOMC, with the annual rotation of regional presidents,
gives it a slightly more dovish cast."
A reuters survey of primary dealers found that 9 of 16 that
responded see QE ending by the end of the year. Six expected QE to
carry into 2014 and 1 expects it to continue into H1 2016. The
average expectation is for the Fed to buy $540bln of Treasuries
this year, which is $45bln a month, alongside an additional $40bln
of MBS being bought per month too. In terms of unemployment, 9 of
the 16 expected it to not fall below 6.5% until 2015, while 6 see
it in 2014 and 1,, not until 2016.