Although the government was able to avoid a shut down a few weeks ago, a bigger financial problem may be brewing as well. As noted in various news outlets, the debt ceiling for the U.S. is just above current levels, and is expected to be breached this summer for sure. Financial service companies have recognized this fact and continue to raise it’s issue to the highest ranks, in an effort to stave off a potential disaster.
According to a letter sent Monday from a top JPMorgan Chase (NYSE: JPM) executive to U.S. Treasury Secretary Tim Geithner, Congress must raise the $14.3 trillion U.S. debt ceiling or risk putting financial markets “in uncharted territory,” which “could trigger another catastrophic financial crisis.” This letter is not reflective of the typical self serving interest the public has come to expect from the banks, this is part of a government appointed position to help on such matters. The JPMorgan executive, Matthew Zames, was writing in his capacity as Chairman of the Treasury Borrowing Advisory Committee, a group comprised of representatives from large banks including Goldman Sachs (NYSE: GS), Bank of America (NYSE: BAC), and BNY Mellon (NYSE: BK), as well as giant investment institutions such as PIMCO and Soros Fund Management. The group meets quarterly with Treasury officials to discuss matters such as frequency, timing and composition of U.S. debt sales. A delay by the government in paying interest or principal could have several disastrous effects, Zames warns, including a pullback by foreign investors, who own almost half of outstanding U.S. debt. The result would be higher U.S. borrowing costs that could kill the recovery. Zames also warned of a potential run on money market funds in the event of a U.S. Treasury default, among other dire events.
The U.S. debt, currently at $14.25 trillion, increases constantly as new debt is issued to retire old debt and the government’s deficit requires a growth in issuance of T-Bills. Congress must vote to allow it to move higher, or the U.S. would be forced to balance the budget immediately, by raising taxes sharply, cutting spending by 40%, or through some combination of tax hikes and spending cuts. Raising the debt ceiling does not eliminate the nation’s financial concerns, it will merely delay them. As the country continues to spend too much, and tax too little, deficit spending must be financed this way and may forewarn of a Greece type disaster unless spending is finally brought under control.
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