Published May 24th 2023

Daily Brief - 🌩️ Time is running out

TLDR: Treasury Secretary Janet Yellen was pretty clear: June 1 is a hard deadline for lawmakers to raise the US debt ceiling. The Treasury has repeatedly said the government will run out of money to pay its bills in early June. A U.S. default would be the first in history, and trigger a slew of legal complications (and put an asterisk next to the global “risk free*” rate, * = not totally risk free but probably better than most risks.) What happens next?

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First, there is the “holiday challenge”. America prides itself on working harder than any country but the government takes The Memorial Day holiday seriously. That poses a challenge. After yesterday, the House has only three more days in session before June 1. The Senate only has two more days. There are no days when both the House and Senate are in session for the rest of the month.

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What if there is no deal?

The Treasury does have a plan B. Codenamed “payment prioritization”, this would stave off a default by paying interest on bonds and cutting back even more from other obligations. Politically, however, putting bondholders ahead of pensioners and soldiers won’t be popular and isn't’ sustainable, anyway.

A default would initially be a short-term disruption. If the government defaults on bills and bonds coming due when it runs out of cash, demand may well remain strong for debt with later maturities on the assumption that Congress would come to its senses before long. In fact, Treasury bills due in June currently have yields of about 5.5% while the August ones are closer to 5%.

In an attempt to stave off a larger crisis, the Fed would treat defaulted securities much like non-defaulted ones, accepting them as collateral and replacing them with good debt. Again, assuming that eventually D.C. would sort this mess out.

But there are downsides to Fed’s help. One, it would reduce political cost to an uncompromising stance.

Second, Fedwire - the settlement system for Treasuries - is coded to have bills disappear once they pass their maturity date. You can hack around that but it’s easy to see how that could go very wrong.

Finally, unable to borrow more money, the government would in effect cut spending by the gap between current tax revenues and expenditures—an overnight reduction of roughly 25%. That’s a big fiscal shock. If it’s only for a month, it would be easy to replace. But going longer than that would inevitably exert a big toll on the economy.

The 2023 recession that seemed inevitable back in 2022 may start to seem so again.

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General Interest: The unexpected way AI will take over the world

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An interesting article in the San Francisco Chronicle asked if we should replace ailing US senator Dianne Feinstein with an AI replica of her personality.

If you were to train an AI on all spoken and written communication by the senator, it’s likely that the AI would more or less respond like Senator Feinstein when faced with a new issue.

We’re reminded of a short story by Greg Egan where a rich man replicates his mind into an android’s and bequeaths his wealth to a trust meant to be directed by the android.

It is not an unlikely scenario to imagine today’s billionaires thinking “who better than me to run my foundation…forever”.

The topic was discussed recently in this Forbes article, for example. Also, read Egan’s story on his homepage here.

Daily Brief - 🌩️ Time is running out

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