To pass or not to pass the debt ceiling is not the question!

The markets are nervous about passing the debt ceiling. They should be more worried about after the debt ceiling is passed as the Treasury will issue new debt and that is going to be a problem. for banks on multiple fronts. Not like they don’t already have problems but here as we are about to add more.

Once out of the clear from a fabricated crisis the real crisis will start. First off the Treasury is going to issue a mountant of new debt. How much? About a trillion in the next 6 months and probably 1.5 to 1.8 trillion depending on tax receipts (probably higher-end versus lower-end estimate).

The Treasury will replenish the TGA account. But how will they do it? he replenishment could be financed out of bank reserves or the RRP. The problem this time is MMF is huge (literally record levels) and it has changed from being mostly institutional deposits to retail. The Treasury will have to replenish the TGA using bank reserves versus RRP just when they need those reserves when the Fed and regulators are going to raise their capital requirements. You know that is coming and heard it yesterday from Minneapolis Fed Neel Kashkari that is pushing for higher capital requirements.

The second problem will be that the banks will continue to hold to the low-yield assets they gouged themselves on back in 2019 to 2022. Who is going to buy those assets when the Treasury will inundate the bond market with new issuance at much higher rates?

How will all this affect the markets? Well, one thing is for sure, when you bring down reserves and hike capital requirements then Banks respond by reducing lending and especially more to the real estate sectors. What could go wrong when you have CRE bought at high values and constantly leveraged as a piggy bank for investors and developers and small/regional banks over-exposed to such loans?

If we think that banks are not going to do great if the debt ceiling is not passed then we are overlooking the fact they won’t after it is. The banking crisis is not done. The problems remain and will continue. It is not the end, nor the beginning of the end, but the end of the beginning.

The markets have not yet realized the full extent of the mess that we have that didn’t start with a pandemic but in fact, started 30 years ago with the Fed put and was accelerated in 2008. Powell is not coming to save the markets as he is a dark comedy actor. He wants to end the Fed put and end the show.