Consigliere: I am already seeing the impact of the debt ceiling deal…

The Speaker of the U.S. House, Kevin McCarthy, and the President of the United States, Joseph R. Biden, came to a tentative deal yesterday (Saturday, 27 May 2023) on the debt ceiling for the United States government.

While a bill is still to be hammered out, MSN and Reuters report that the deal would put a cap on discretionary spending. Discretionary spending is decided by Congress every year and includes items such as defense spending, foreign aid, education, and research. Non-defense discretionary spending is to remain relatively flat. Defense spending is set to increase by eleven percent, reportedly in-line with President Biden’s requests.

The $31.4 trillion debt ceiling will be suspended until January 2025.

https://traderswithedge.com/?r=348

The national debt is comprised of total US government borrowing accumulated over the course of U.S. history. Most of the debt takes the form of Treasury bills, notes, and bonds. The debt limit is the cap on the amount of outstanding debt the U.S. government is allowed to carry, a limit currently at $31.4 trillion.

The politics of finger pointing has nothing to do with the direction of foreign exchange prices as far as the Consigliere is concerned. I would hope that traders ignore the blame game, especially when you consider that 97% of the accumulated debt occurred prior to the Biden Administration.

Rather the focus should be on the possibility of an increase in inflation resulting from the potential increase in the money supply. For example, when the supply of bonds issued to make up for revenue shortfalls increases, the price of these bonds will fall while the interest rates and yields on these bonds increase. The increase in yields and interest rates will attract more dollars into the U.S. markets. Unless goods and services increase to sap up the increased supply of dollars, there will be an inflationary impact. More dollars will chase the current amount of goods.

In part for this reason, I expect this weekend’s debt deal to incentivize an upward push on USD/JPY and downward push on EUR/USD.

Let me know what you think.

Alton Drew

28 May 2023

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