September could bring a disaster


IF you have been following the international news, then you are aware that over the weekend Hurricane Harvey—one of the strongest storms in recent memory—has devastated the state of Texas. Hardest-hit has been Houston, the fourth-largest US city, which lies some 50 miles from the Gulf of Mexico.

The storm has caused historic flooding with as much as 1.2 meters of rain in a region populated with some 6.5 million people. The comparison to the flooding of Metro Manila from Typhoon Ondoy in 2009 is accurate, not so much for the water but for the ability of the government to protect—or not protect—its citizens.

Even as the rains continue to fall, there are deep questions as to why the city of Houston was not put under mandatory evacuation and the counter argument of how a mass evacuation might have created another disaster. Further, the “blame game” of which government—local, state, or national—deserves the brunt of criticism starts even if people are still stranded. There is a high probability we will see a similar scenario unfold on the economic and financial front as September 2017 ends.

Like a killer storm, we can see it coming. There are two critical but separate deadlines converging on September 29. The first is the absolute necessity of the US Congress to raise the debt ceiling to give the US Treasury the authority and ability to raise funds through selling government debt in order to pay the bills of government. Going into October, the US the government will run out of money to cover all government operations. The problem is that Congress is not functional right now, having shown that it has been unable to agree on virtually anything.

The second event coming is the approval of the government budget for the coming year. September 29 is the last business day of the fiscal year. Congress could either vote a budget or invoke a “continuing resolution” that keeps funding in place until a budget is eventually passed.

These two situations are joined at the waist. A completed budget is useless without raising the debt ceiling; an increased debt ceiling provides funds but budget legislation still must be enacted to spend that money.

Of course, “deadlines” for the government are flexible, just like its ethics. However, the situation may quickly become critical and potentially catastrophic because a government shutdown from not raising the debt ceiling and/or not having a budget could cause a liquidity freeze or an event where buying and selling is not possible. Government money has unfortunately become the lifeblood of the financial markets.

Part of the reason the US stock market is up nearly 10 percent this year is the anticipation of both tax reduction and increased government spending. Tax reform is currently dead and the debate over a debt-ceiling increase could be prolonged. Both of these—debt ceiling and budget—are political as much as they are economic issues. The US political system right now is broken.

If the debt ceiling is not raised, the public and private bond market will lose liquidity and freeze. When one market goes into a coma, the demand for liquidity moves to another sector—like the stock market—and then that sector shuts down.

If you cannot get your money out of the debt market due to a lack of liquidity, then you try to get funds from the stock market. Prices fall, buyers walk away. Without buyers, liquidity vanishes and prices fall further. October has traditionally been a dangerous month for the financial markets. Let’s hope 2017 is not one for the record books.


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