The Repeating Debt Ceiling Dilemma

In a story that tends to repeat itself on a yearly basis, the Federal government is approaching the point where it might run out of cash by mid-October. According to the Treasury secretary, Janet Yellen, the exact date is October 18.


This new estimate by Janet Yellen raises the risk for a potential default of the US, an event that could prove apocalyptic in a worst-case scenario. The magnitude could lead to crashing markets, delayed payments, and a roughed-up economy.


While this has never occurred and lawmakers have always managed to take the necessary measures even as the deadline looms, the prospect of it is terrifying, according to traders and market players.


The actual deadline is subject to change based on the non-linear cash flows of the government. Excluding financing, the daily cash flow of the Federal government sits somewhere around $50 billion per day and has reached as high as $200-300 billion.


Ultimately, raising the debt ceiling is the ideal scenario that could prevent this far-fetched catastrophe. Nonetheless, it’s never ideal to wait till the last minute to do so as it puts the reputation and credibility of the US economy and financial system at risk.


On a different note, US markets traded sideways yesterday and have not yet recovered from the mid-week sell-off that took place. The Nasdaq trades around the 14900 area while the S&P trades near 4400. The Dollar Index continues to move higher and has broken above the 94.00 level after finding strong support just under the 90 area. Some traders believe this is setting the stage for a new uptrend that could go on for some time, based on their technical perspectives. On the economic front, quarterly GDP and unemployment claims are set to be released today while Fed chairman Powell is expected to testify.


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