The COVID pandemic emergency has been declared ended. I think (at least for now) we can stop reporting on cases, etc.
There is a lot happening with the economy, however. In the world, the US and California. Even locally the City of Pasadena and LA County are passing budgets for the next fiscal year. As we can and have information, I will will keep you informed.
From the New York Times: The U.S. debt limit has been reached and the Treasury Department is finding ways to save cash. After it runs out of maneuvers, what once seemed unfathomable could become reality: The United States defaults.
What happens next? by Joe Rennison
The far-reaching effects are hard to fully predict: from shock waves in financial markets to bankruptcies, recession and potentially irreversible damage to the nation’s long-held role at the center of the global economy.
The probability of a default remains low, at least based on opposing lawmakers’ assurances that a deal will be done to raise or suspend the debt limit and the long odds implied by trading in certain financial markets. But as the day approaches when the United States begins to run out of cash to pay its bills — which could be as soon as June 1 — investors, executives and economists around the world are gaming out what might happen immediately before, during and after, hatching contingency plans and puzzling over largely untested rules and procedures.
“We are sailing into uncharted waters,” said Andy Sparks, head of portfolio management research at MSCI, which creates indexes that track a wide range of financial assets, including in the Treasury market.
Some corners of the financial markets have already begun to shudder, but those ripples pale in comparison to the tidal wave that builds as a default approaches. The $24 trillion U.S. Treasury market is the primary source of financing for the government as well as the largest debt market in the world.
The Treasury market is the backbone of the financial system, integral to everything from mortgage rates to the dollar, the most widely used currency in the world. At times, Treasury debt is even treated as the equivalent of cash because of the surety of the government’s creditworthiness.
Shattering confidence in such a deeply embedded market would have effects that are hard to quantify. Most agree, however, that a default would be “catastrophic,” said Calvin Norris, a portfolio manager and interest rate strategist at Aegon Asset Management. “That would be a horror scenario.” The government pays its debts via banks that are members of a federal payments system called Fedwire. These payments then flow through the market’s plumbing, eventually ending up in the accounts of debt holders, including individual savers, pension funds, insurance companies and central banks.
If the Treasury Department wants to change the date it repays investors, it would need to notify Fedwire the day before a payment is due, so investors would know the government was about to default the night before it happened.
Understand the U.S. Debt Ceiling
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What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.
The limit has been hit. What now? America hit its technical debt limit on Jan. 19. The Treasury Department will now begin using “extraordinary measures” to continue paying the government’s obligations. These measures are essentially fiscal accounting tools that curb certain government investments so that the bills continue to be paid. Those options could be exhausted by June.
What is at stake? Once the government exhausts its extraordinary measures and runs out of cash, it would be unable to issue new debt and pay its bills. The government could wind up defaulting on its debt if it is unable to make required payments to its bondholders. Such a scenario would be economically devastating and could plunge the globe into a financial crisis.
Can the government do anything to forestall disaster? There is no official playbook for what Washington can do. But options do exist. The Treasury could try to prioritize payments, such as paying bondholders first. If the United States does default on its debt, which would rattle the markets, the Federal Reserve could theoretically step in to buy some of those Treasury bonds.
Why is there a limit on U.S. borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.
There is more than $1 trillion of Treasury debt maturing between May 31 and the end of June that could be refinanced to avoid default, according to analysts at TD Securities. There are also $13.6 billion in interest payments due, spread out over 11 dates; that means 11 different opportunities for the government to miss a payment over the course of next month.
Fedwire, the payment system, closes at 4:30 p.m. If a payment due is not made by this time, at the very latest, the markets would begin to unravel.
Stocks, corporate debt and the value of the dollar would probably plummet. Volatility could be extreme, not just in the United States but across the world. In 2011, around when lawmakers struck a last-minute deal to avoid breaching the debt limit, the S&P 500 fell 17 percent in just over two weeks. The reaction after a default could be more severe.
Perhaps counterintuitively, some Treasury bonds would be in high demand. Investors would likely dump any debt with a payment coming due soon — for example, some money market funds have already shifted their holdings away from Treasuries that mature in June — and buy other Treasury securities with payments due further in the future, still seeing them as a haven in a period of stress.
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Joydeep Mukherji, the primary credit rating analyst for the United States at S&P Global Ratings, said that a missed payment would result in the government being considered in “selective default,” by which it has chosen to renege on some payments but is expected to keep paying other debts. Fitch Ratings has also said it would slash the government’s rating in a similar way. Such ratings are usually assigned to imperiled companies and government borrowers.
Moody’s, the other major rating agency, has said that if the Treasury misses one interest payment, its credit rating would be lowered by a notch, to just below its current top rating. A second missed interest payment would result in another downgrade.
A slew of government-linked issuers would also likely suffer downgrades, Moody’s noted, from the agencies that underpin the mortgage market to hospitals, government contractors, railroads, power utilities and defense companies reliant on government funds. It would also include foreign governments with guarantees on their own debt from the United States, such as Israel.
Some fund managers are particularly sensitive to ratings downgrades, and may be forced to sell their Treasury holdings to meet rules on the minimum ratings of the debt they are allowed to hold, depressing their prices.
“I would fear, besides the first-order craziness, there’s second-order craziness too: Like, if you get two of the three of the major rating agencies downgrade something, then you have a bunch of financial institutions that can’t hold those securities,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said at an event in Florida on Tuesday night.
President Biden met with congressional leaders at the White House on Tuesday, continuing discussions on the national debt limit.
The financial system’s plumbing freezes up, making trading more costly and difficult.
Importantly, a default on one government bill, note or bond does not trigger a default across all of the government’s debt, known as “cross default,” according to the Securities Industry and Financial Markets Association, an industry group. This means that a majority of the government’s debt would remain current.
That should limit the effect on markets that rely on Treasury debt for collateral, such as trillions of dollars worth of derivatives contracts and short-term loans called repurchase agreements.
Still, any collateral affected by a default would need to be replaced. CME Group, a large derivatives clearing house, has said that while it has no plans to do so, it could prohibit short-dated Treasuries from being used as collateral, or apply discounts to the value of some assets used to secure transactions.
There is a risk that the financial system’s pipes simply freeze over, as investors rush to reposition their portfolios while big banks that facilitate trading step back from the market, making buying and selling just about any asset more difficult.
Amid this tumult in the days after a default, a few investors could be in for a major windfall. After a three-day grace period, some $12 billion of credit default swaps, a type of protection against a bond default, may be triggered. The decision on payouts is made by an industry committee that includes big banks and fund managers.As panic subsides, confidence in the nation’s fundamental role in the global economy may be permanently altered.
Foreign investors and governments hold $7.6 trillion, or 31 percent, of all Treasury debt, making them vital to the favorable financing conditions that the U.S. government has long enjoyed.
But after a default, the perceived risk of holding Treasury debt could rise, making it more costly for the government to borrow for the foreseeable future. The dollar’s central role in world trade may also be undermined.
Higher government borrowing costs would also make it more expensive for companies to issue bonds and take out loans, as well as raise interest rates for consumers taking out mortgages or using credit cards.
Economically, according to forecasts by the White House even a brief default would result in half a million lost jobs and a somewhat shallow recession. A protracted default would push those numbers to a devastating eight million lost jobs and a severe recession, with the economy shrinking by more than 6 percent.
These potential costs — unknowable in total but widely thought to be enormous — are what many believe will motivate lawmakers to reach a deal on the debt limit. “Every leader in the room understands the consequences if we fail to pay our bills,” President Biden said in a speech on Wednesday, as negotiations between Democrats and Republicans intensified. “The nation has never defaulted on its debt, and it never will,” he added.
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Both parties seem more willing to compromise on the debt limit.
Path to a deal
For months, the U.S. has been barreling toward a debt limit crisis. Democrats refused to negotiate, and Republicans insisted on a deal stocked with right-wing policy priorities. It was unclear how, or whether, they would avert catastrophe.
This week, the atmosphere in Washington shifted. The chances of getting a deal done now seem higher. Why? Because both sides budged: Democrats are negotiating, and more Republicans have suggested that they are willing to compromise. Speaker Kevin McCarthy, the Republican leader, said yesterday for the first time that he saw a “path that we could come to an agreement.”
“That was a marked change in attitude from earlier in the week, when McCarthy was very pessimistic,” my colleague Carl Hulse, The Times’s chief Washington correspondent, told me.
The stakes are still high. If Congress does not increase the debt ceiling — the limit on money that the U.S. can borrow — the government may run out of money as early as June 1. It would no longer be able to pay its bills, potentially defaulting on its debts. That could send the financial markets, and the economy, into chaos (as this newsletter has detailed).
Today’s newsletter will explain what changed this week and why there is greater optimism about a deal.
Democrats’ moves
Over the past few months, President Biden and congressional Democrats declined to negotiate over the debt limit. They characterized Republicans as holding the country hostage, threatening to wreck the economy to get their way on policy. Democrats hoped their stance would push Republicans to increase the debt limit without attaching conditions.
But then the Treasury Department announced this month that the U.S. could hit its debt limit in just weeks. And House Republicans passed a debt limit bill with right-wing policy priorities, including sweeping but unspecified spending cuts, rollbacks of Biden policies and work requirements for Medicaid, food stamps and welfare benefits.
Democrats blinked. Last week and this week, the White House hosted congressional leaders to discuss the debt limit. This week, they had a small breakthrough: Biden agreed to have his staff meet directly with McCarthy’s aides to hash out a deal. By cutting out other congressional leaders, Biden and McCarthy are more likely to reach a compromise quickly.
Republicans’ moves
On the Republican side, it was always hard to see what kind of deal McCarthy could bring forward that would placate different House Republican factions, particularly on the far right. After all, it took 15 ballots for Republicans to finally vote McCarthy in as speaker. He has barely held his caucus together since. And McCarthy indicated he would push for a debt-limit increase that includes everything in the House Republican bill.
As the debt limit deadline drew closer, and as Democrats started to negotiate, Republicans softened their stance. Moderate Republicans have said they are willing to compromise. “We know we’re not going to get everything,” Representative Don Bacon of Nebraska told Politico. And McCarthy’s staff is, after all, meeting with Biden’s in the hopes of reaching a deal.
What could that deal look like? It will probably include some limits on federal spending, a clawback of unused Covid relief funds, changes to speed up permits for energy infrastructure and, potentially, new work requirements on some federal benefits. That would amount to “a fairly normal spending and budget deal, typical of a divided government, with a debt-limit increase attached,” Carl said.
That deal would not fully satisfy House Republicans’ right flank. But their votes would not be needed to pass a bill if moderate Republicans joined with Democrats.
Possible failure
Of course, any potential deal could still collapse.
One current sticking point is new requirements that would force recipients of government benefits to prove that they have a job or are trying to find work. Republicans want to impose those conditions on Medicaid, food stamps and welfare. Biden has indicated that he is open to doing so for food stamps and welfare, both of which already have some work requirements, but not for Medicaid, which has none.
Republicans further to the right say that a deal needs to include work requirements for all three programs. Members of the right-wing Freedom Caucus have called on McCarthy to stop negotiating with Biden until the Senate passes the House Republican bill with such conditions. More liberal Democrats say that they will oppose any new work requirements. “I cannot in good conscience support a debt ceiling proposal that pushes people into poverty,” said Senator John Fetterman, Democrat of Pennsylvania.
If they come together in opposition, the flanks on the left and right could blow up a deal, my colleague Catie Edmondson, who covers Congress, wrote.
Congress could still pass a bill without those flanks, if moderate lawmakers from both parties vote for it. But there are limits to how far the president and speaker will go without the full support of their parties. Biden does not want to aggravate liberal Democrats whom he likely needs for future votes. And McCarthy wants to keep his job; if far-right lawmakers feel betrayed, they could call a vote to oust him as speaker.
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Recovery Progress: CA vs. US-The April data generally showed more positive news than in prior months. Nonfarm jobs (seasonally adjusted) showed a gain of 67,000 in April, with an upward revision to the previous month’s number to 11,900. However, the April results continue the general pattern in the jobs numbers since last July of one month reporting jobs in the 60s followed by two months of sharply lower results. Employment continued the moderate gains seen last month with a gain of 25,200, but the total still remains 203,300 (1.1%) below the pre-pandemic peak in February 2020. Even with the uptick in the last two months, California employment has remained little changed since last June, putting pressure on the state’s ability to expand jobs going forward.
Recovery Progress: CA Jobs by Wage Level-Using the unadjusted series to provide a more detailed look at jobs by industry wage level, recovery across the three wage levels began to converge as gains in the higher wage industries began to level out. Lower wage industries still show the weakest recovery, but showed the strongest gains as seasonal hiring picked up.
California Labor Force-4.5% is the CA Unemployment Rate. California's reported unemployment rate (seasonally adjusted) in April rose 0.1 point to 4.5% as the labor force showed minor gains. The US rate improved by 0.1 point to 3.4%. California had the 3rd highest unemployment rate among the states and DC.
CA Employment-Employment was up 25,300 (seasonally adjusted), the highest monthly gain since last May. The April results finally reversed the dip in total employment since last June. US employment rose by 139,000. California unemployment rose 7,400, while US unemployment was down by 182,000.