Yes Agreement In Principle

An Agreement In Principle.

"Agreement to allow things to get worse has been reached."

And the great relief of the US Debt Ceiling resolution is at hand. Much as most had expected, an eventual agreement at the last moment. Though this writer had doubts.

Those doubts look to be solved as both Biden and McCarthy express very positive sentiments about the likelihood of their agreement in principle being passed by both Congress and the Senate.

We should not expect a smooth passage however. With both Democrats and Republicans already expressing a degree of outrage or non-acceptance of the proposed adjustments.

I keep saying ‘in principle’, because ‘guess what’ as the President likes to say, there is as yet still no document? The text and detail is still be worked on and written by staffers of both sides.

There is a slight risk of this being a giant case of the devil is in the detail. Though we should see an actual document produced in the next 24-48 hours. It is then expected Congress members will need two days to consider the big.

It is hoped the Bill will be voted on in the House on Wednesday. This is achievable, but it could still be delayed until Thursday. Then it goes to the Senate.

It is highly likely in these circumstances, as the Bill finally makes its way to the desk of the President, that a workaround will be found if necessary for the next government debt payments due on June 6th. Therefore a default can most probably be avoided at this stage. Such default avoidance is still not a complete certainty, however it is now much less of a risk.

Markets are so far reacting cautiously. Buoyed, but cautiously.

This agreement merely rolls the issue to potentially more politically friendly times post the Presidential election in two years. Nothing is certain in this regard, and it is possible resolution will be even more difficult then, than it has been on this occasion.

Also, there is the bigger question of just what really happened here?

The US is deciding to borrow ever more funds from the private sector and astound the world, to massively increase its debt. Yet again. The whole process is akin to getting another credit card to pay for your existing credit cards minimum payments. A long term solution to the US spiralling debt decay is actually no closer.

Already at 130% of GDP, and now going higher. Even higher again as the economy slows, and there are cutbacks to tax revenue enforcement and collection. Borrowing is going up as quite possibly tax receipts have already peaked. On top of an already 130% of GDP debt position.

Markets will likely to continue to rise on the back of this news, but real relief may only come when the Bill passes in the House. Whatever that Bill is. as we do not have agreed detail yet. Though we know Defence and Social Security have been ring-fenced, Energy projects are to be favoured, while Permitting remains a major bone of contention.

There is still plenty more wrangling to be done before it gets passed in the House. And we will be back in two years time with the US in an even more dire debt pressure cooker crisis.

Agreement to allow things to get worse, has been reached.

Clifford BennettACY Securities Chief Economist

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