Authored by Wolf Richter via WolfStreet.com,

Hammered by waves of layoffs, swooning stocks, collapsing cryptos, and 6% mortgage rates…

Home prices for all of California are down, Southern California too is getting hit, even San Diego, but the Bay Area is the standout in terms of the steep and deep plunge in prices.

Sales of single-family houses plunged by 37% year-over-year in the Bay Area. But in Southern California, where price declines haven’t been that huge yet, sales collapsed by 48%. In all of California, sales plunged 44%, to 240,000 homes, just a hair higher than during the bottom of Housing Bust 1 in late 2007.

The median price of single-family houses in the San Francisco Bay area plunged by 30% in December from the crazy peak in March 2022, by nearly $455,000, from $1.54 million to $1.08 million in nine months, according to the California Association of Realtors today.  The plunge in December – after months of layoff announcements by big and small companies in the area – was particularly brutal.

That this 30% plunge from peak only put the median price back roughly where it had been in December 2020 shows how crazy the price spike had been during the free-money pandemic. But not many people bought a house during these two years. So in essence, this 30% plunge isn’t a big deal in the overall scheme of things.

But for people who used to look on Zillow constantly to see how much richer they have gotten by just living there, well, they might have to stop looking. Problem solved – unless they want to sell.

Year-over-year, the median price dropped about 10%. Per square foot, the median price also dropped about 10%.

Some caveats here about median prices: They’re volatile and they’re seasonal, and they can get skewed by the mix of what actually sells, etc. etc. But in a huge market like this – the nine-county Bay Area has a population of around 7.6 million people – the median price is a reasonably reliable indicator of the direction and magnitude of price changes.

Seasonally, January is the low point for median prices in the Bay Area. So one more month to go. Then the spring selling season normally shows up when demand normally perks up prices. But this may not be a normal year.

Where is this demand supposed to come from? Who is going to buy at these prices, with layoff announcements spreading across the area on a daily basis, and with stock prices of local companies (stock-based compensation plans) and cryptos getting demolished? Who will have the desperation to buy at these still sky-high prices? At what prices will the buyers come out of the woodwork? That will be put to the test over the next few months.

The five big counties of the Bay Area.

Silicon Valley: San Mateo County: The median price of single-family houses plunged by 30% from the peak in April 2022, by $726,000 in nine months, from $2.40 million in April to $1.67 million in December. Year-over-year, the median price plunged by 14%.

This median house price is now below where it had been in December 2020, and below where it had first been in April 2018.

Sales of single-family houses plunged 38% year-over-year. That was bad enough. But sales of condos have essentially frozen, having collapsed by 64% year-over-year.

Silicon Valley: Santa Clara County (includes San Jose): The median price of single-family houses plunged 25% from the peak in April 2022, by $455,000, from $1.97 million to $1.48 million. Year-over-year, the median price plunged 15%.

Sales of single-family houses: -43% year-over-year. Sales of condos: -48% year-over-year.

San Francisco: The median price of single-family houses plunged 24%, or by $496,000, from the crazy desperate lock-in-the-low-mortgage-rate-peak in March 2022, falling from $2.06 million to $1.56 million, despite the uptick in December. Year-over-year, the median price is down 7.5%.

Sales of single-family houses: -24% year-over-year. Sales of condos: -52% year-over-year.

Condos are a big part of the City, including numerous fairly new towers South of Market, where sales have collapsed, as the tech companies headquartered in the area, including Twitter and Salesforce, have announced a gazillion layoffs. Year-over-year, condo prices have plunged 23%.

Alameda County (East Bay, includes Oakland): The median price of single-family houses plunged 31% from the crazy peak in May 2022, or by $479,000, from $1.54 million to $1.06 million. Year-over-year, the median price is down 11%.

Sales of single-family houses: -37% year-over-year. Sales of condos: -45% year-over-year.

Contra Costa County (East Bay): The median price of single-family houses plunged 26% from the peak in April 2022, or by $272,000, from $1.05 million to $778,000. Year-over-year, the median price is down 6%.

Sales of single-family houses: -36% year-over-year. Sales of condos: -50% year-over-year.

Median time on the market in the Bay Area before the property was pulled by the frustrated seller, or before it sold, more than doubled year-over-year from 13 days in December 2021 to 27 days in December 2022.

Everyone can figure that January is going to be bad. So now all eyes are on the upcoming spring selling season, amid this constant drum beat of layoffs at companies headquartered in the area, or with large operations in the area. Beyond the actual layoffs, the layoff announcements also create a lot of uncertainty among people who haven’t been laid off yet. And that can’t be a good motivator to go out on a limb and buy a still ridiculously overpriced home.

*  *  *

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. 

Via Wealthion.com,

Car prices went bananas after COVID hit — propelled by inventory shortages from disrupted supply chains & the unprecedented stimulus sent to businesses & households.

Now here in 2023, the boom is looking over.

Used car prices, which nearly doubled post-COVID, fell for most of 2022 — though they still remain much higher than their pre-pandemic lows.

Also, lax lending standards in extending auto loans during the recent boom are coming back to bite lenders — the percentage of loans that are at least 60 days delinquent are at their highest in more than a decade.

Where is the auto market headed from here?

Will patient buyers be rewarded with better values in 2023?

To find out, Wealthion’s Adam Taggart interviewed Lucky Lopez, an automotive industry YouTuber whose boots-on-the-ground reporting has recently propelled him into the mainstream media’s spotlight.

Watch the video below to hear Lucky’s insider take:

For more free interviews like these with top Money & Markets experts, visit Wealthion’s YouTube channel at https://www.youtube.com/wealthion

One week ago we looked at the latest consumer credit data where we found not one but two flashing red alerts:

• First, the total amount of credit card debt hit a new all time high, which however was to be expected from one of the most consistently increasing series across all US economic data, and one which predictably is correlated to the US savings rate which is at all time lows.

• Second, thanks to the Fed’s crusade to spark a great recession, the average rate across US credit cards just rose to an all time high 19%+

Summarizing these ominous trends we concluded that…

The combination of record high credit card debt and record high credit card interest is nothing short of catastrophic for both the US economy, and the strapped consumer who has no choice but to keep buying on credit while hoping next month’s bill will somehow not come. Unfortunately, it will and at some point in the very near future, this will also translate into massive loan losses for US consumer banks; that’s when Powell will finally panic.

And while the big US banks are diversified enough – and flooded with enough reserves for now – to deflect attention from spiking charge offs rates on their balance sheets, even though as we discussed last week the credit loss provisions (a hedge against a spike in bad debt) across the Big Four banks did in fact jump the most in a decade (excluding the covid shock)…

… some of the smaller credit-card companies can no longer avoid the reality that the US consumer has finally cracked and a wave of defaults is coming.

Presenting Exhibit A: Discover Financial Services (DFS), a credit card issuer which traditionally targets to low to middle-income households, and which yesterday reported earnings that were so scary, Wall Street has uniformly dubbed them “shocking.” But while the bulk of the company’s historical results were actually not all that bad, it was its forecast that a stunner: in a presentation on its website, DFS forecast that its charge offs would climb as high as 3.9% this year (it gave a range of 3.50% to 3.90%) which is more than double the 1.82% net charge off rate it booked for all of 2022 and was about 100bps higher than the 2.8% consensus estimate.

Cutting to the chase, this is what the company’s historical and projected charge offs look like:

And since this is a net number, the gross number will likely hit 5% or more, a level not seen outside of painful recessions.

As Bloomberg explains, credit cards typically reach their peak loss rates about 18 months after origination. That means that Discover is expecting losses to tick up this year on accounts it started in 2021, which was a much bigger year for credit-card growth than 2020, when the pandemic forced the company to curtail new business. Starting last year, Discover began gradually tightening underwriting standards by offering smaller lines of credit to new customers, although the combination of a recession plus tapped out consumers will ensure a surge in charge offs for that and any one vintage. 

Wall Street was predictably unhappy with this doubling in the company’s charge off forecast. Here is a summary of analyst reactions:

Piper Sandler, Kevin Barker

• While DFS’s topline was stronger, it missed estimates mainly because of an increase in provisions due to outsize growth, along with higher operating expense growth
• Analyst notes the “rapid” net charge-off (NCO) growth will likely be an issue across the industry due to outsize growth the past two years

Oppenheimer, Dominick Gabriele

• “Consensus shocker” is DFS’s NCO guidance; even to reach the low end, it likely means charge-offs near 5%
• Peers may not share DFS’s expected NCO normalization/ramp, yet it will likely make investors incrementally cautious on low FICO players, analyst says
• Notes that management team is generally conservative and believes that some investors will see the guidance as too bearish

KBW, Sanjay Sakhrani

• Says that it was a better-than-expected quarter but the outlook for net charge-offs is likely weighing on the stock
• Notes that the forecast “likely contemplates a range of scenarios on the macroeconomic backdrop”
• Adds that while investors are “nervous” about credit quality, the guidance isn’t “thesis- changing”

Citigroup, Arren Cyganovich

• “We expect DFS shares to underperform peers on Thursday given a much higher expected 2023 net-charge off guide than the street”
• Says rest of the company’s guidance was mixed but notes that “earnings materials lacked details of assumptions included in the guidance, which would appear to us to imply the beginnings of a mild recession assumed”
• “While likely a positive long-term, investors will likely question growing consumer loans by double digits as we likely enter into a recession”

Chief Executive Officer Roger Hochschild tried to put some lipstick on the big, and told Bloomberg that “The losses are going up from artificially low levels,” adding that “overall, we feel really good about what we’re seeing in our portfolio” the market did not share his sentiment and DFS shares tumbled as much as 7.7%, their biggest drop in 6 months before recovering some losses. The company’s results also weighed on rivals Capital One and Synchrony, with all three credit-card issuers among the worst performers in the 67-company S&P 500 Financials Index.

As for the company’s charge off forecast, we can assume that it was made with the company not making a recession its base case. So throw a recession in, a tapped-out consumer with a record low savings rate which means most middle class spending is now funded on credit, and you have an extremely explosive mixture just waiting for a match.

Authored by Tom Nemechek via Knowledge Leaders Capital blog,

In an abrupt volte-face, on December 7, 2022, China announced an end to its “Zero-COVID” policy after the country endured almost three years of damaging lockdowns. This began a flurry of speculation on the impact that China’s reopening would have on the world economy. Central to the lockdown and reopening thesis is the idea that the Chinese have under-consumed during the lockdowns and will now over-consume to make up for time lost.

As the chart from Goldman Sachs makes clear, the amount of bank deposits piled up to a historic extent in 2022, leaving the consumer with significant dry powder to consume. China holds as much as 14% of its GDP in domestic household deposits. This number increased by a further 15 trillion Yuan last year.

The smart folks at Piper Sandler calculated that China’s domestic deposits are above trend in an amount equal to about 6.6% of GDP.

Credit: Piper Sandler

With China just starting to reopen in December, the bar was low for December economic data. Retail sales were expected to be down -8.47% over the last year. Instead, they surprised and were only down -1.8%. They were up 5% month-over-month in December, shocking most observers.

The last few weeks have seen beat after beat in Chinese economic reports, leading to a rash of upward revisions. Bank of America raised its 2023 GDP forecast to 5.5% and Goldman raised its prediction to 5.2%, compared to the consensus of 4.8%.

So, the Chinese consumer is cashed up and ready to spend from a higher base than was believed. At the same time:

1. Industrial production is well below trend having grown only 1.3% over the last year, and

2. Imports and exports are down -7.1% and -9.9% respectively.

This suggests that in addition to the consumer powering the economy in 2023, industrial production is likely to make a material contribution as well. The Bloomberg consensus (above) only expects 5% growth in industrial production, but if the consensus turns out to be as accurate as its recent retail sales predictions, this is likely very understated.

Dr. Copper is suggesting that China’s GDP estimates will be on the march higher over the next few months, likely driven by revisions higher in retail sales and industrial production. I charted copper against China consensus GDP forecasts lagged 120 days, and the data as of today looks like China’s GDP forecast could be set to rise above 5% in the months to come.

While there are obviously still headwinds to China’s growth, China recently confirmed plans for the relaxation of its Three Red Lines (三红线) policy, which restricts property developers’ access to capital. On balance it looks like we could expect a positive pulse to global economic growth this year from China’s reopening and relaxation of select restrictions. The China reopening trade appears to be on.

The US Coast Guard has announced that it is closely monitoring a suspected Russian spy ship not far off the coast of Hawaii, and that the vessel has been lingering there for weeks.

“In recent weeks, the US Coast Guard has continued to monitor a Russian vessel, believed to be an intelligence gathering ship, off the coast of the Hawaiian Islands,” a Coast Guard press release said.

“While foreign military vessels may transit freely through the U.S. economic exclusive zone (EEZ), as per customary international laws, foreign-flagged military vessels have often been observed operating and loitering within Coast Guard District Fourteen’s area of response,” it added.

On Wednesday the Coast Guard in addition to the fresh announcement shared a clip of the alleged Russian spy ship’s movements near Hawaii.

The brief surveillance footage released to the public clearly shows a fast-moving military ship being monitored by what’s likely a drone or plane…

In recent weeks, the @USCG has continued to monitor a Russian vessel, believed to be an intelligence gathering ship, off the coast of the Hawaiian Islands.⁰

Full story: https://t.co/yEy7JbYMQL pic.twitter.com/fEdiQPRMpS

— USCG Hawaii Pacific (@USCGHawaiiPac) January 19, 2023

Last May, US Indo-Pacific Command had been alerted to the movements of another Russian ship near Hawaii, which the US military tracked before it exited the area. US and Russian encounters at sea or in the air near Hawaii remain relatively rare, while there are typically a handful of such incidents off the Alaskan coast, usually involving Russian long-range bombers patrolling the Barents Sea.

Earlier this week Russia said it intercepted and escorted a German maritime patrol plane over the Baltic Sea when it approached Russian territory, at a moment tensions with NATO are soaring due to the war in Ukraine. Addressing the Monday confrontation, the Russian Defense Ministry described, “After the foreign military aircraft turned away from the state border of the Russian Federation, the Russian fighter returned to its home airfield.”

By Irina Slav of OilPrice.com

China’s reopening is set to drive global oil demand to a record high of 101.7 million barrels per day (bpd) this year, up by 1.9 million bpd from 2022, the International Energy Agency (IEA) said on Wednesday, raising its demand growth estimate for 2023 by 200,000 bpd from 1.7 million bpd growth expected in December.   

Almost half of the oil demand growth this year will come from China after Beijing lifted its Covid restrictions, the IEA said in its closely-watched Oil Market Report (OMR) for January. 

At the same time, world oil supply growth in 2023 is set to slow to 1 million bpd, following last year’s OPEC+ led growth of 4.7 million bpd.

“An overall non-OPEC+ rise of 1.9 mb/d will be tempered by an OPEC+ drop of 870 kb/d due to expected declines in Russia,” the IEA said in the report.

As a result, market balances are set to tighten as this year progresses, the agency noted.

“This year could see oil demand rise by 1.9 mb/d to reach 101.7 mb/d, the highest ever, tightening the balances as Russian supply slows under the full impact of sanctions. China will drive nearly half this global demand growth even as the shape and speed of its reopening remains uncertain,” the IEA said.

Russia and China will be the two wild cards in the market this year, it added.

Russian oil exports dropped by just 200,000 bpd in December despite the EU embargo and the G7 price cap. But the record price discounts on Russian benchmark export grades reduced Russia’s oil revenues by $3 billion to $12.6 billion last month – the lowest since February 2021, the agency has estimated.

The EU ban on Russian oil products from February 5 could soon mean that “the well-supplied oil balance at the start of 2023 could quickly tighten however as western sanctions impact Russian exports.”

The IEA’s upbeat outlook on demand this year sent oil further rallying as prices extended Tuesday’s gains into early trade on Wednesday. As of 6:15 a.m. ET, WTI Crude was up by 1.83% at $81.68. Brent Crude topped the $87 mark to trade at $87.29, up by 1.49% on the day. 

Authored by Simon White, Bloomberg macro strategist,

The stock market is liable to reach a new low due to the triple threats of recession, inflation and poor liquidity, while the October nadir had few of the characteristics normally associated with a major market bottom.

The current base in this bear market, reached in October, is a line in the sand. If it is not to be breached the economy will have to safely navigate the channel between non-resurgent inflation on one side and no recession on the other. But it’s a very narrow channel, leaving a slim possibility both fates will be avoided.

Stocks in this cycle are very sensitive to inflation. Falling inflation, as the market began to expect from the middle of last year, meant real rates would become more restrictive, especially if nominal rates were to be held as steady and as elevated as the Fed desired.

The market pushed back, not believing the economy was resilient enough to handle this for long. The more the Fed talked rates higher, the greater the market priced in rate cuts, keeping expected real rates less restrictive than they otherwise would’ve been, and leading to the deepest yield-curve inversion since the 1980s.

Equities benefited from the benign environment. The relative price of crash insurance fell as more rate cuts were priced in. Why pay up for insurance when it looks like the Fed will soon have your back?

The flipside of this is that an unexpected change in the trajectory for inflation would be negative for equities. Either an easing in how fast CPI is falling, or an outright rise, would be enough to cause yields to jump and stocks to sell off.

But if inflation carries on falling at a rapid pace, that’s probably reflective of a slowing economy – one that is highly likely to be in recession this year.

Recession prediction is not easy, with individual indicators having a patchy historical record. However, when multiple indicators point to a recession at the same time – as they are today – the odds begin to swing dramatically in favor of one. To be of the view that there will be no recession (which may of course happen) means dismissing a ton-weight of evidence pointing in the other direction.

Equities face more downside if a recession hits. The S&P is currently only down from its peak by about 60% of the median peak-to-trough fall seen in a recession. Copper, HY credit and S&P EPS are pricing in an even lower probability of a recession, while the yield curve implies one is guaranteed.

If the economy manages to thread the needle of avoiding a recession while inflation continues to trend down, equities should rally. But then they become part of the problem. The Fed wants to see sufficient tightening in financial conditions to give it confidence inflation will be durably snuffed out.

Conditions can’t tighten while equities are rallying, given they are about 80%-90% negatively correlated with each other. No recession and well-behaved inflation will give the Fed all the impetus it needs to clip the stock-market’s wings by tightening policy more.

Even if the Fed is done tightening, the liquidity backdrop is already very unfavorable for equities, further increasing the chance of new lows. One of the most useful measures of liquidity is excess liquidity – the difference between real-money growth and economic growth – which remains very low. Excess liquidity is like a safety net for risk assets; without it, stocks are exposed to much steeper falls than when it is high and rising.

Durable market bottoms are normally marked by major capitulation and selling exhaustion. However, the low seen in October exhibited few of these signs. The percentage of NYSE stocks above their 200-day moving average dropped, but has been lower in other major market bottoms, while the number of stocks making new 52-week lows was significantly above levels it hit during the 2009, 2015/16 and 2020 tradeable lows.

There was no spike in volatility or volume, and other asset markets such as credit remained relatively well behaved. Further, retail-investor cash allocations in October stayed well below the highs they reached in the 2001 and 2008 bear markets, showing the buy-the-dip mentality has yet to be properly tested.

China’s re-opening is increasingly being seen as a reason for optimism, but it would have to be an inflationless boost to global demand that would allow the Fed to ease back as planned and leave equities unperturbed. Even then, the assumption that China quickly goes back to where it was after three years of lockdowns is a bold one.

A line in the sand is not supposed to be crossed; stocks look unlikely to heed that advice.

Prosecutors in Santa Fe, New Mexico are planning to charge actor Alec Baldwin with involuntary manslaughter after he pulled the trigger on a loaded gun on the set of “Rust” in 2021, according to the Wall Street Journal, citing a person with knowledge of the investigation.

The film’s armorer, Hannah Gutierrez Reed, is also expected to be charged with involuntary manslaughter in the incident, while the film’s assistant director, David Halls, has agreed to plead guilty to the negligent use of a deadly weapon.

The October 2021 shooting killed 42-year-old cinematographer Halyna Hutchins, and wounded the director, Joel Souza. Baldwin and the “Rust” production team reached a financial settlement in October with Hutchins’ family in a wrongful death lawsuit.

Baldwin, meanwhile, has sued several “Rust” crew members, including Halls and Gutierrez Reed, alleging that they were negligent in their duties to protect the cast and crew, and giving him a loaded gun.

Gutierrez Reed’s attorney said that Baldwin “is the only one responsible for this tragedy.”

Involuntary manslaughter, a fourth-degree felony in New Mexico, carries a maximum sentence of 18 months in prison.

According to an August, 2022 FBI forensics analysis, the revolver that Baldwin had in his hand was in working order, and would not have discharged unless it was fully cocked and the trigger was pulled – contradicting a statement the actor made to ABC‘s George Stephanopoulus, when he said: “the trigger wasn’t pulled. I didn’t pull the trigger.”

According to affidavits from the Santa Fe County Sheriff’s Office, Mr. Halls took one of three prop guns laid out on a rolling cart and handed it to Mr. Baldwin to film the scene. Mr. Halls yelled “cold gun,” indicating the firearm didn’t have live rounds. Mr. Baldwin took the gun and fired it, one of the affidavits said. Investigators have also questioned Ms. Gutierrez Reed’s actions as the person in charge of guns and ammunition on set. -WSJ

Violins are out https://t.co/rfq0DklX8W pic.twitter.com/0B0JAn4v38

— Newsquawk (@Newsquawk) January 19, 2023

Lawyers for Halls and Gutierrez Reed have said their clients had no idea the gun was loaded with live ammunition and have denied any wrongdoing.

That said, the New Mexico Occupational Health and Safety Bureau said in April that the film’s producers knew that firearm safety procedures weren’t being followed, and that they failed to do anything about it. Safety inspectors also found that Halls didn’t consult with Gutierrez Reed before handing the gun to Baldwin.

The production company behind the film, Rust Movie Productions, was slapped with a civil penalty of nearly $137,000 – the maximum allowed under state law – by the workplace safety agency. RMP has contested the findings in an administrative proceeding.

Two people have been killed and at least 60 injured after huge crowds descended all at once on the large sporting complex Basra International Stadium in the port city of the same name in southern Iraq, resulting in a massive stampede.

Fans were there to see the Gulf Cup final – a much anticipated event given it was the first time since 1979 that Iraq has hosted the major regional soccer tournament. Chaos ensued after security closed the gates to the stadium as it had reached capacity and the area was subject to extreme overcrowding. Footage showed the stopped crowds outside the stadium just before the surge and deadly stampede…

#البصرة #العراق قبل ٨ ساعات من المباراة pic.twitter.com/yV1KGtnmD2

— MohammedHisham (محمد) (@TheGodFather10q) January 19, 2023

It happened hours before the start of the Gulf Cup final, with officials urging the throngs to disperse given the increasingly dangerous situation. “A large number of fans, many of them without tickets, had gathered since first light to try to get in,” an Iraqi Interior Ministry official said.

The death toll could rise, given the severity of injuries, as Al Jazeera reports: “The official Iraqi News Agency (INA) has quoted a medical source as saying some of those injured in the stampede were in critical condition.”

“INA put the number at 60. The Iraqi Football Association told Al Jazeera 20 people suffered suffocation and another 80 were injured.”

Harrowing footage of the stampede aftermath showed people lying flat on the ground screaming for help, and with others unconscious or possibly deceased.

At least one person was killed and some 60 people were injured in a stampede outside the Basra International Stadium in Iraq, hours before the Gulf Cup final football match pic.twitter.com/0mXLfYJ6H4

— TRT World (@trtworld) January 19, 2023

Later, even after the disaster and with emergency vehicles on the scene and security forces trying to clear the area, crowds of people could still be seen trying to access the sports complex by climbing gates and large fences.

According to Al Jazeera, the match proceeded. “Basra’s governor confirmed that the match will be held in the city and not be transferred to another country as had been speculated,” the report indicated.

Two people have reportedly died and many others have been left injured after a stampede outside the Basra International Stadium ahead of the Gulf Cup Final between Iraq and Oman.

It was the first major game in the country in four decades. pic.twitter.com/Jps8iyNxzY

— DW Sports (@dw_sports) January 19, 2023

The Gulf Cup began on January 6, and includes teams from Iraq, Kuwait, Bahrain, Oman, Qatar, Saudi Arabia, the United Arab Emirates and Yemen. Iraq had long been banned by FIFA and other major soccer organizations during the Saddam Hussein era, especially after the 1990 invasion of Kuwait.

Authored by Michael Maharrey via SchiffGold.com,

Here we go again.

The clock is ticking down to another US debt ceiling fight.

According to Treasury Secretary Janet Yellen, the US government will officially bump up against the debt ceiling Thursday (Jan. 19).

The debt ceiling is “the total amount of money that the United States government is authorized to borrow to meet existing legal obligations, including Social Security and Medicare Benefits, military salaries, interest on the national debt, tax refunds and other payments.”

On Dec. 16, 2021, a law went into effect setting the new debt limit at $31.381 trillion. Once the government hits that debt level, it can no longer sell Treasuries or other debt instruments to fund spending.

But this doesn’t mean the government will simply shut down. The Treasury Department can implement “extraordinary measures” in order to continue funding government operations.

According to a letter Yellen sent to Congress, the Treasury will redeem existing investments and suspend future investments in the Civil Service Retirement Disability Fund and the Postal Service Retiree Health Benefits Fund. It will also suspend investment in a federal employee retirement system savings plan. According to Yellen, these moves will “reduce the amount of outstanding debt subject to the limit and temporarily provide extra capacity for Treasury to continue financing operations of the federal government.”

It’s not clear how long the government can continue operating using these extraordinary measures. Most analysts estimate it will give Congress until sometime in June. It will depend somewhat on how much revenue the IRS collects this spring.

HISTORY

Congress imposed the first debt ceiling in 1917. The Second Liberty Bond Act capped debt at $11.5 billion. This was supposed to put some kind of restraint on government borrowing. Of course, it didn’t. Every time the debt approaches the ceiling, Congress simply raises it. Between 1962 and 2011, lawmakers jacked up the debt “limit” 74 times, according to the Congressional Research Service.

In 2013, Congress came up with a new trick. Instead of raising the debt ceiling, it just suspended it. In 2014, Congress set the debt limit with a built-in “auto-adjust.” The auto-adjust ended in March 2015 with the debt ceiling set at $18.1 trillion. After that, Congress simply suspended the debt ceiling three times.

After Congress set the current debt ceiling in December 2021, it took just 46 days for Uncle Sam to dig itself another $1 trillion in the hole, pushing the national debt above the $30 trillion mark. Less than a year later, in October 2022, the national debt pushed above $31 trillion, setting the stage for yet another debt ceiling battle.

And this one might be a doozy with Republicans controlling the House, Democrats running the Senate, and Joe Biden in the White House.

LOOKING AHEAD

Make no mistake, Congress will raise the debt limit. It will posture. It will bluster. It will play a dramatic game of chicken. We might even have to endure another fake government shutdown. But when it’s all said and done, Republicans and Democrats will reach some kind of compromise. They will not leave the current debt ceiling in place. That would mean default – something nobody is seriously willing to contemplate.

In an honest world, the US would just go ahead and default. There is no way the federal government will ever pay off a $31 trillion-plus dollar debt. The government can’t even get its budget deficits under control. The Biden administration is spending money at a half-a-trillion-dollar per month clip, and any talk of spending cuts by the Republicans is nothing but window-dressing. The GOP had ample opportunity to slash spending during the first two years of Trump’s administration when it controlled both the White House and Congress. Instead, it ramped up spending and ran massive deficits.

As Peter Schiff noted in a recent tweet, the feds are running a Ponzi scheme to keep the government solvent.

The U.S. Treas. Sec. has admitted the only way to avoid a default on the National Debt is to raise the #DebtCeiling so the Govt. can borrow from new lenders to repay existing lenders. This amounts to an official admission that the U.S. is running the world’s largest Ponzi scheme.

— Peter Schiff (@PeterSchiff) January 16, 2023

Given that the debt ceiling has never meaningfully restrained borrowing and spending, why doesn’t Congress just scrap it altogether?

I think there are two reasons.

• First, doing away with the debt ceiling would expose America’s fiscal irresponsibility to the world. We all know the federal government has a spending problem. But the debt ceiling creates the illusion of responsibility. It’s like a magic trick. We all know it’s not really magic. It’s an illusion created by the magician. But we like to believe it’s magic. It makes us feel good. The debt ceiling is an illusion that allows Americans to feel like their “representatives” are acting responsibly.

• Second, the debt ceiling is ready-made for political theater. And there’s nothing politicians love more than political theater.

Republicans and Democrats are already jockeying for position in the debt ceiling fight. Republican leadership is demanding spending cuts before it will consider lifting the ceiling. A week ago, White House press secretary Karine Jean-Pierre said,  “We will not be doing any negotiation.”

“I think it’s arrogance to say: ‘Oh, we’re not going to negotiate about anything,’ especially when it comes to funding. If anyone had a child and their credit card kept hitting the limit, you’d want to change the behavior,” Speaker of the House Kevin McCarthy (R) said.

Yellen warned that a failure to raise the debt ceiling would have dire consequences.

Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability.”

Yellen’s not wrong. And this is exactly why Congress will raise the debt ceiling – or simply kick the can down the road by suspending it again.

In the meantime, brace yourself for hot political rhetoric and a lot of finger-pointing across the political aisle. We may even get another mythical government shutdown. But trust me, they won’t shut down any of the important things. The NSA will keep spying on you. The IRS will continue to collect taxes from you. The wars will rage on. And members of Congress will continue to collect their paychecks. There’s always money available for the things the government really wants to do.

The whole debt ceiling debate is nothing but political gamesmanship. So, grab a chair. Pop some popcorn. And enjoy the show.