By Graham Bishop, Investment Director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK
US politicians have failed to raise the nation’s debt ceiling – a legislative cap on the amount of debt incurred by the US Treasury. This has been little more than a formality in the past, but the failure to come to an agreement this time around has been pre-empted by a nervous Treasury building up its cash balance in order to cover spending requirements.
Should these cash balances be run down, in the short term it would provide a liquidity boost to the US economy through Treasury cash entering the system. However, this liquidity windfall would not last indefinitely. Exact projections of when the Treasury’s cash could run out are impossible to pinpoint, but autumn 2019 is one potential endpoint if a deal is not reached in Washington.
For now, a number of outcomes are still possible, including quite simply raising the debt ceiling, i.e. kicking the can down the road. However, few of the available options will work without the cross-party cooperation which has been so lacking in US politics in recent history. We continue to monitor this underreported situation, awaiting further developments in the liquidity picture of the world’s most powerful economy.