JPMorgan Sets Up a War Room for the upcoming debt crisis

The X-Date is the day the U.S. Treasury goes broke. It's not the same as the debt ceiling, but it is a consequence of the failure of Congress to raise the debt ceiling. Right now, the Treasury is at the debt ceiling. That means it has no legal authority to issue net new debt. It can issue new debt if old debt is maturing. That keeps the total debt unchanged; you're just rolling over maturing debt into new debt without increasing the total debt. The problem is that the U.S. is running a $2 trillion per year deficit. It's not enough to just roll over existing debt. You have to issue new debt to finance the deficits and that's where the debt ceiling bites. How is Treasury paying its bills today without new debt? They're shucking and jiving. There is some net cash flow from tax collections in the April timeframe, although that's being rapidly depleted by tax refunds. There are some other tax collections including excise taxes. The Treasury has some slush funds including the Exchange Stabilization Fund (ESF) currently over $100 billion. The ESF was created in 1934 using the profits from FDRs confiscation of gold at $20 per ounce and subsequent revaluation to $35 per ounce. It has been used numerous times, including the 1994 Mexican bailout which Congress refused to authorize (ESF use has no congressional oversight). Recently, part of the ESF was used to bail out Silicon Valley Bank. But eventually, even the cash flow and the slush funds run out of juice. Then the Treasury goes broke. That's the X-Date. Treasury Secretary Janet Yellen recently estimated the X-Date is June 1^st. Yellen knows little about monetary or fiscal policy and her June 1 date was probably a political ploy to put pressure on Republicans to raise the debt ceiling without conditions as favored by the White House. We shouldn't rely on Yellen's estimates; she's not very competent at this. All the same, there is an X-Date and it's coming sooner than later. Most investors are ignoring this and assuming that Congress will strike a deal with the White House, raise the debt ceiling, and make the X-Date go away (for now). Don't be so sure. This article details how JPMorgan has convened a War Room that will soon be meeting three times per day to deal with the fallout of the X-Date and the possibility of the U.S. missing principal and interest payments on U.S. government securities or possibly skimping on social security payments or other entitlements. Whether the X-Date arrives or not, investors should at least be prepared for the market turmoil that will arise as the impasse between Congress and the White House comes down to the wire. It's a good idea to lighten up on equity positions and increase allocations to gold and cash. That way, even if the Treasury goes broke, you'll still be solvent.

Jim Richards