Something that irks everyone in markets is the following chart. Folks, it is the US no longer actually approaching the debt ceiling, but actually having hit the debt ceiling on Thursday of last week. and we should touch a little bit on the implications of uh, hitting the debt ceiling and some of the potential Solutions or not solutions that that have been proposed for dealing with the debt ceiling. So first, we hit the debt ceiling limit.

That doesn't actually mean anything yet because we haven't defaulted on our debt. Everybody's worried about default, so think about it. kind of like maxing out your credit card but not actually missing a payment yet on what's owed or what you're using your credit card for. This is because the government's kind of like going around looking in the Mattress Corner you know, the crevices of the mattress and trying to rejigger things to make sure that well, we can extend the time to that that in which we would actually default out to something known as default day or as Janet Yellen calls it the X State Some of the ways that the government plays with the X state is they can pause contributions or investments into government workers retirements Health Care payments.

They can delay tax refunds. They can also suspend new investments into things uh, like the disability fund or the post office Retirement health Care benefit funds. They can do a lot of this. and and right now the estimate is that we'll have enough money not to default on our debt until hopefully June 5th, 2023.

So somewhere in here some analysts suggest maybe July and August. So her date of June 5th is a little bit of a surprise. but yes, right now, we're at a hundred percent of our authorized debt limit. Now, when the debt limit and the debt ceiling was first created, it was designed to allow the government to actually borrow money and make it easier for the government to borrow money.

But what it's actually done is now it's become a political battle and has led to a government shutdowns much like in 2011 where the United States lost its AAA debt rating when we were just hours away from a default and everyone on TV had to deal with seeing Parks shut down. Uh, people pissed that they couldn't go to work or weren't getting paid as government workers, even some essential services And that ended up leading our credit rating to fall. And the stock market did react to this. However, the sort of impact in the bond market was relatively limited.

Uh, we, we didn't see much uh, inter in the way of fluctuation and yields any more than we would have seen otherwise on a regular basis. So it seemed like markets kind of got over this. and since 2011, we haven't had such crazy debt ceiling locations. However, now you've got concerns that, well, what if this time is different and what if this time Republicans end up more hardlined than what they have been in the past.

Part of the reason people are this fearful is because of Kevin McCarthy's election. Remember that Kevin McCarthy speaker election was so contested that it took 15 rounds to get him elected. We haven't seen that many rounds of a speaker election since the mid-1800s when we were debating slavery. That's intense now.

We've had multiple speaker rounds as recently as the 1920s, but nowhere near as intense as what we saw just now since the 1850s, which is remarkable. Now Kevin McCarthy calls for cuts to discretionary spending and something actually that a lot of people think is kind of odd Republicans want to cut spending potentially for defense by as much as 75 billion dollars Now Part of the reason or motivation for that is they want to crimp the ability for the current Biden Administration to send money to Ukraine for Aid Keep in mind that so far NATO has been pretty committed I mean I would say astutely committed to supporting Ukraine even to the point now that you've got Poland in the Netherlands considering sending Generation 4 F-16 fighter jets to Ukraine which would completely change the future of the battlefield in Ukraine they have essentially no air superiority or uh, really, capabilities of offense Beyond some tactics that they're using like drone attacks uh uh against Russian uh positions now or even into Russian territory actual Russian Land Uh and so Republicans are calling for a limit to how much offensive power that Ukraine could get and really a limit to the spending. In an argument that if we continue supporting this war, we could end up in a World War III situation. and given that Russia is a nuclear power, we end up walking into a nuclear war now.

NATO so far seems convinced and Europe seems convinced that the likelihood of Putin engaging in any kind of nuclear combat including strategic deployments of sort of localized nuclear warfare or Warheads is very, very small. and even though Putin has threatened it, NATO seems to be calling his bluff even just because of talks around F-16s going to Ukraine, but also now more than just armored personnel carriers potentially going to Ukraine, but potentially actual battle tanks coming over like the German Leopard uh battle tank, uh heading over to Ukraine or at least potentially heading to Ukraine from Poland. This is what Republicans want to reign in. They want to reign in the billions of dollars of discretionary spending that the Biden Administration has available.

The Biden Administration says they will not negotiate over the debt ceiling and this, uh, and if anything, the Biden Administration so far seems convinced that the debt limit should be raised. Chuck Schumer argues that we want to move quickly on raising the debt ceiling, and given the potential stalemate that we saw by Republicans under Kevin McCarthy's leadership where even Republicans can't get on the same page with things, there's a lot of nervousness that this could be another one of those default environments Where, yep, the U.S finally ends up not only leading to a government shutdown much like what we saw in 2011, but for the first time ever, the government ends up defaulting on its debt. That could be really bad, because it could reiterate that Black Swan event. Remember earlier, we talked about how there's a lack of liquidity in the bond market, and if there's a lack of liquidity in the bond market, and all of a sudden we potentially default on our debt, then there will be even less liquidity in the bond market.

And and now you're in a situation where the debt ceiling itself could create the Black Swan that crashes markets substantially lower than we've ever seen. In this last down cycle, that is, we could hit brand new lows, the vix could Spike to 40 or 50, the fear-based index, the volatility index, and we could actually see capitulation that the United States has just lost their ability to operate institutions, and foreign governments reduce their willingness to actually buy U.S treasuries as foreign assets because now they're more unstable or the value of them has just plummeted, yields rise, and the economy goes into a deeper, darker recession. The worst time to probably default on our debt would be in a recession, which is one that we're probably in right now now. There have been some ideas around this, and some of these ideas seem interesting.

Some of them have already been shot down. Uh, in terms of how to potentially solve the disaster of approaching the debt limit. One of the ideas as put together by Barons is actually this idea that maybe maybe Joe Biden can just break the law and play continuous spending. Anyway, let's take a look at this argument because it's interesting.

It's I find it actually a little bit more interesting than the trillion dollar coin, which I'll reiterate in just a moment. So there are two potential things that the government uh, can do, and one of them is the trillion dollar coin, which we'll talk about in a moment, but the other is the institution of something known as the Congressional Budget and Impoundment Control Act of 1974. this Law requires that the President spend money for programs that have been legislated. Now, the reason this came up is because President Nixon said, you know what? I disagree with a bunch of spending.

So I'm just gonna not spend the money and so Congress is like, dude, we've allocated this money, You have to spend it and Nixon's like make me And so they did. They passed the 1974 Impoundment Act which forces the President to spend money for things that Congress has allocated. In other words, Joe Biden potentially has a choice of breaking the law in that he breaks the law by not spending money uh, via the 1974 law or he breaches the debt limit. Either way, he's in a situation where Barron says he would be in violation of one of his obligations as president.

That is the obligation to uh, either make the payments as required by the 1974 law or uh, he ends up breaking uh the the idea the law in the other direction by saying well, we're just going to break the debt ceiling and make sure we kind of honor the other half of this law which says I'm not allowed to break the law of not making payments on things So this is a really interesting thesis that I believe this was the Barons editorial board put together. Yeah, Baron Baron's advisors editorial team put this together and they say they've actually sent this idea to the Treasury Department to encourage them to do just this. Now they say they haven't heard back, but uh, Barons makes it pretty clear that hey, we have a potential solution where you could break less of a law than a big law by breaking the debt ceiling and potentially driving us into a uh, a deeper recession. So fascinating idea.

Will it actually go anywhere? Probably not. Because we'll probably just end up raising the debt ceiling, We'll come to some kind of last minute negotiated settlement. Now there is this idea that the Oba that the Obama Administration came up with. and this was the idea that let's just create a trillion dollar coin.

and uh, the since since the Treasury Department can mint money, they'll just create a trillion dollar coin. And if they create a trillion dollar coin, we have a coin around here. No, I don't have a prop around here. If they create a trillion dollar coin, they could just go to the Federal Reserve and say hey, we'd like to deposit this with you and the FED would just hand them a trillion dollars of cash.

And given that the government runs at about a trillion dollar deficit every year, that could fund us for about a year now. Janet Yellen has argued that this could be rejected by the Federal Reserve and it's unlikely that it would actually be accepted. but the idea was that this trillion dollar coin would actually be a physical coin made of platinum and it would be pegged at one trillion dollars. There is a picture of potentially what it could look like and that's on screen.

Now the one trillion dollar coin. It's basically just it looks like a thick quarter with dollar sign one t on it and the Statue of Liberty. All right, so that's an idea, but again, probably neither of ideas are likely to happen. Uh Congress could potentially just pass some kind of uh, borrowing suspension uh, or or basically a short-term extension for three to six months my expectation and and end up negotiating, uh, some kind of debt hike.

Uh, you know. My guess is that real talks in Congress won't actually start happening until after tax season. One of the reasons for that as well is because the treasury Department's going to get a lot of money from tax Collections and then the treasury Department will actually be able to more accurately tell us when the X date is for the debt ceiling. But usually the debt ceiling debates, at least historically, are just a bunch of political hardlining.

and they're a bunch of nonsense.