US dodges potential financial Armageddon for now

CNN

By Charles Riley, CNN Business

The Senate voted along party lines to raise the debt ceiling on Thursday, authorizing $480 billion in borrowing that avoids a looming US government default but sets up another showdown in early December.

Investors no doubt should be relieved. Alarm bells had been ringing on Wall Street for weeks, and JPMorgan Chase was already hard at work preparing for a potential default by the world’s largest economy.

But the reprieve is only temporary. Once the Senate’s stopgap measure is approved by the House of Representatives, the Treasury will be able to pay its bills through December 3. Incidentally, that’s also the deadline for averting a government shutdown.

That’s right: The United States is now less than two months away from a potential simultaneous government shutdown (when existing legislative approvals for government spending are set to expire) and default (when the debt ceiling prevents the Treasury from paying its bills).

It bears repeating that pretty much every economist and markets expert agrees that a US default would tank stocks and do great harm to the economy. We’re talking instant recession.

According to Moody’s Analytics, nearly 6 million jobs would be lost, the unemployment rate would spike back to nearly 9% and stock prices would plummet by one-third, wiping out about $15 trillion in household wealth.

And for what? Hiking the debt ceiling doesn’t have anything to do with new spending or borrowing. Instead, it allows the government to carry out activities already authorized by Congress.

Treasury Secretary Janet Yellen, who used to lead the Federal Reserve, has some thoughts about lawmakers essentially taking the US economy hostage every few years in order to score some cheap political points.

“It’s led to a series of politically dangerous conflicts that have caused Americans and global markets to question whether or not America is serious about paying its bills,” Yellen told CNN’s Erin Burnett on Thursday.

“It’s an impossible situation. Congress needs to debate these issues when they’re deciding on spending and taxation, not to, every several years, put a hard stop and say, ‘Well, now we’re not going to let the Treasury Secretary pay the nation’s bills,'” Yellen added.

One point observers sometimes make is that the United States has never defaulted. But it turns out that may not be strictly true.

In fact, there have been at least three instances when Washington “was unable to pay all its obligations on time or made payments on terms that disappointed creditors,” according to this fascinating 2016 paper from the Congressional Research Service.

The first snafu followed the War of 1812, when military expenses and lagging revenue left the Treasury unable to make some interest payments on federal debt. The second came during the Great Depression, when President Franklin Roosevelt suspended the gold standard and Treasury owners lost out.

More recently, the Treasury failed to make timely payments to some small investors in the spring of 1979, when automatic data processing was at a relatively primitive stage, according to the paper.

So how do we know a US default now would be disastrous? The short answer is that we don’t — but it’s really not worth finding out.

“Other countries that defaulted in the 1930s or in the 19th century apparently suffered no lasting damage to their ability to borrow,” the Congressional Research Service concluded. “Nonetheless, the prominent role of US Treasury securities in global and domestic financial arrangements implies that systematic delays in Treasury payments now could have serious consequences.”

Why the jobs recovery will stay bumpy

Friday’s jobs report will shed some light on whether August’s disappointing numbers were just a blip — or the start of an unwelcome trend.

Either way, the recovery could be bumpy until America gets all the way through the Covid crisis, my CNN Business colleague Anneken Tappe reports.

“The pandemic has always been in the driver’s seat of this recovery,” Nela Richardson, chief economist at ADP, told reporters on Wednesday. “The name of the jobs recovery game is still ‘uneven.'”

Last year, the labor market was fragile, and during the colder months, the battered leisure and hospitality industry lost jobs — something that could happen again this year. Meanwhile, hundreds of thousands of women left the labor force in September 2020 as children returned to virtual classrooms and parents had to step in as teaching assistants.

Whether either of these phenomena return remains to be seen.

The numbers: Economists polled by Refinitiv predict half a million jobs were added to the economy last month. The unemployment rate is expected to tick down to 5.1%, just a hair below the August rate of 5.2%.

That would be more than double the disappointing 235,000 jobs added in August, which underperformed expectations by about half a million.

Tesla is heading to the Lone Star state

Tesla HQ is getting a new home.

“I’m excited to announce that we’re moving our headquarters to Austin, Texas,” CEO Elon Musk said Thursday during a Tesla shareholders meeting.

The electric car company is currently based in Palo Alto, California, near its original headquarters in San Carlos, and its first factory, in Fremont.

But the company has repeatedly sparred with California officials. And Musk said Thursday that there is a “limit to how big you can scale in the Bay area.”

He cited housing affordability and the long commutes as other negative factors. The Austin factory, on the other hand, is five minutes from the airport and 15 minutes from downtown, he said.

Musk himself said in December that he moved to Texas, and one of his other companies, SpaceX, is developing a massive rocket system known as “Starship” in South Texas.

Despite the headquarters move, Musk said Tesla plans to continue to “significantly” expand in California.

“This is not a matter of, sort of, Tesla leaving California,” he said. The company intended to increase output from its Fremont factory by 50%.

Up next

The US jobs report for September will be published at 8:30 a.m. ET.

Also today: The OECD could announce a global deal on corporate tax

Coming next week: Investors will be watching for the latest inflation numbers out of the United States.

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